For months now, AOL has been promising to “return cash to shareholders” by buying back stock.As an AOL shareholder (since 1997), I have an urgent plea for the company.
PLEASE DON’T DO IT.
Really–PLEASE. Just don’t. At least not now.
Because it’s an awful idea.
If shareholders are squawking at you about the need to give them cash or buy back stock, just tell them to shut up. They don’t know what’s good for the company. And if they think you should be buying back stock at this price, $28 a share, they also don’t know what they’re talking about.
Why shouldn’t you buy back stock?
Because the vast majority of companies that buy back stock buy it at exactly the wrong time–when it’s expensive. In so doing, they burn a real asset–cash–on an asset that may well decline in value (overpriced stock).
The time to buy back stock is when it is obviously drastically undervalued.
When AOL’s stock was trading at $11 late last year, it was arguably drastically undervalued.
But now it’s trading at ~$28, in part because AOL just sold some worthless patents for more than $1 billion (great move!)
And now shareholders are apparently demanding that AOL give them some of that cash by buying back stock.
Well, screw that.
AOL, you’re doing all the right things. You’re making aggressive bets with your cash (Huffpo, et al), and you’re selling off non-strategic assets (worthless patents) to raise more cash.
Most importantly, you are being given credit for these moves by the market.
Your stock has more than doubled in a year.
The market is valuing you in part on the cash you have on your balance sheet.
So don’t waste it buying back your stock!
Keep your powder dry.
If your stock craters again–really craters–and you don’t have any other need for the cash, then, fine, buy back your stock.