On buybacks and how to follow its execution

There are so many things that baffle me about stocks that I sometimes need to take a step back and look over my shoulder. When I first knew about buybacks, I immediately understood the concept: same pie, fewer and bigger slices. Easy and simple to understand and, perhaps more important, hard to execute badly. What if a company is taking slices back from the market at a considerable cost, while at the same time new slices are being introduced to the pie through employee compensation? Well, the shareholder’s capital is being wasted then, because the money is being used to maintain the current condition, when it should be used to improve it.

AIG, the property and casualty insurer that fell through the cracks and, quite possibly, created the cracks of the financial mayhem, has a $2B buyback implemented, which is a good idea when one considers its stock is below book value. This retired stock can mean less dividend distribution, which in the long-term is good.

A buyback should be straight-forward to follow in a company’s balance sheet: simply check if there are more treasury stock or less issued shares. Well, in AIG’s case there aren’t less issued shares, there are in fact more issued shares. That’s strange. If issued shares are shares outstanding plus treasury stock, and the company’s buyback is yanking shares outstanding and converting them into treasury stock, then the number of issued shares should be less or equal (less if the company chooses to completely retire the shares).

Probably, AIG hasn’t been retiring its stock. It has been accumulating it as treasury stock (to dispose of it when the stock price is more attractive) and the increase in shares issued is tied to options and employee compensation.

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