Stock buybacks — what are they good for?
When it comes to the more than $100 billion that big biotech companies have spent in recent years, Leerink analyst Geoffrey Porges might well sing back: Absolutely nothing.
By the analyst’s calculations, the companies, which include Gilead Sciences Inc. GILD, -5.36% , Amgen Inc. AMGN, +1.96% and Celgene Corp. CELG, -1.02% , among others, have actually produced a negative rate of return on their stock buybacks, though they were also able to influence earnings-per-share growth in the process.
Stock buybacks “have destroyed more than $12 billion in value, and generated no positive return in total, at least as a portfolio investment,” Porges said.
“Going forward, in an industry characterized by large dominant products of finite duration and with very few sustainable sources of competitive advantage, we believe investors should view buybacks with caution, and possibly regard them as value destroying.”
Related: Amgen turned in a strong second quarter — but analysts say things are looking bleak and Investors love Amgen’s buybacks if not its growth
Stock buybacks, also called share repurchases, are a type of financial engineering that occur when companies purchase their own shares.
Buybacks are also controversial. They ostensibly benefit shareholders, whose stock is then worth more, but they also benefit executives and lift a company’s earnings per share results.
Companies should instead invest in their own businesses, either by way of products (for biotech companies, research and development) or through deals, critics say, thus benefiting the overall economy, too.
The Leerink analysis, released on Tuesday, homed in on the six large biotechnology companies that frequently do buybacks: Gilead, Amgen, Celgene, AbbVie Inc. ABBV, -4.58% , Alexion Pharmaceuticals Inc. ALXN, -1.86% and Biogen Inc. BIIB, -0.66% , which have spent a total of about $100 billion on these programs since 2014.
Of that, $34 billion in stock buybacks occurred this year alone. Many companies have launched stock buyback programs this year, in large part because of a new Republican tax law that went into effect in January.
Related: Republican tax bill makes big winners of Amgen, Gilead and other drugmakers
Just two of the companies had a positive return to their current stock price over that time period, Biogen (3%) and Amgen (7%), according to Porges. The others ranged between -31%, for Celgene, and -1%, for AbbVie. Overall, the theoretical rate of return would come at a loss of 6% at current stock prices, he said, and 0% if using prices from the bull market at the end of August.
Stock buybacks had a bigger impact when it came to companies’ EPS results. In 2017, full-year EPS results were inflated by between 5% (Alexion) and 22% (Gilead) for those six companies, according to the report.
Related: Why the buyback frenzy may be bad for U.S. stock investors
The stock market has, to be fair, had one of its worst Octobers in years. The S&P 500 SPX, +1.09% has dropped 8.6% month-to-date and the Dow Jones Industrial Average DJIA, +0.97% has declined 6.7%.
But “we find that from 2014-2017 only half of the companies repurchased stock at an average price lower than the current stock price, and therefore generated any positive return on the investment,” Porges said. Moreover, though the market has recently turned around, “the returns for many of these companies were only barely positive even at the height of the recent bull market in the sector.”
Biotech companies do have a harder time assessing whether buybacks are beneficial, because their businesses can be so precariously difficult to predict, Porges noted.
Still, he said, a better use of that money might be through dividends, since they are more likely to actually benefit shareholders, rather than high-paid executives.
