Originally Posted by
webecheck
If I was mgmt and I knew the long term prospects of the company were good, the market was undervaluing my stock, and i had a glut of cash I wanted to put to use...I would forego using the cash for recapitalization provided my current assets could get the job done, undergo a massive buyback until my stock was fairly or overvalued, then release those treasury shares when I want to recapitalize my fleet and my stock price has essentially doubled or more. The stock has almost doubled off the low a couple months back...all those buyback shares have proven to be a wise decision at this point in time. If the shares are retired, stockholders win because of a negative dilution effect. If those shares are reissued at higher prices the company is better off, and the stockholders may also be as well depending on the ROI of the treasury share value. If they are reissued at lower prices than the buyback price, the company and stockholders all lose.
It remains to be seen what ultimately happens with this glut of buyback cash that has been used, but it's possible we all may win from it.
I still don't see it.
You absolutely can't attribute all or even most of the stock increases the entire sector has seen to buybacks. IOW, had airlines not bought back a single share, the ross section of airlines and every individual airline would still have achieved most of the gains they achieved. The increases really started well before the buybacks became trendy anyway.
My broader point is one day we
will wake up in the middle of a financial storm and deeply regret the many billions wasted on buybacks. Maybe, as you suggest, if its timed perfectly and used with precision, it could result in better numbers down the road on some things. But I don't ever see any airline making more from this than they paid to do it.
The last time it rained, SWA crowd surfed above the entire industry taking marketshare with complete impunity and almost putting a legacy or two out of business, while paying 130 seat drivers higher than whale pay. All because they were making what, a billion a year off the hedges?
We still have a lot of debt too, despite the hype that they're paying it down. DL has less debt on capital but more on pensions. There will come a time when one or more legacies rues the day they whizzed away many many billions on something that will be viewed as relatively frivolous in hindsight.
Then again, B-School managers (not to be confused with leaders) are famous for measuring their mistakes in billion dollar increments.