This is the most embarrassing part of Yum Brands' horrendous earnings report

Yum Brands is crashing.

After reporting earnings on Tuesday that were a huge miss and giving a downbeat outlook on China — where the company records 54% of its sales — shares of the fast food giant were down as much as 19%.

And while the disappointing operating results were obviously a huge disappointment to investors, the timing of its stock buybacks might be even worse.

In its earnings announcement, the company disclosed that, “Year-to-date through October 5, 2015, we repurchased 4.5 million shares totaling $US370 million at an average price of $US82.”

So basically, the company spent $US370 million worth of shareholders’ money to repurchase stock — which is something companies do when they think their stock is undervalued — and then the value of the company fell by almost a fifth. Said another way, Yum just spent $US370 million buying back a chunk of the company at a 20% premium. Brutal.

Throughout the post-recession bull market, buybacks have perhaps been the most controversial thing done by US corporations.

What has basically happened is US companies have borrowed lots of cash at very low interest rates and used that money to repurchase their own stock, essentially making less of themselves available to investors in public markets and elevating the one thing investors want to see: earnings per share.

The maths behind this is that by buying back shares, companies make the denominator in the earnings per share equation — earnings divided by shares outstanding — smaller.

Via FactSet, here’s the latest on how much stock companies bought back last quarter.

And what’s been so controversial about the increase in buybacks is that many folks would like to see US corporations borrow money cheaply and then invest in things like equipment or more employees.

But the use of cash to carry out buybacks has been derided as simply “financial engineering,” or something that only benefits the financialized aspect of a company instead of what it actually does (like sell food or make planes or something).

(The other main way to return cash to shareholders — since buying back stock is returning cash to shareholders via higher earnings per share — is by paying a dividend.)

Now, buybacks are not always bad.

Warren Buffett, for example, thinks buybacks are the best way to return money to shareholders since they allow managements to more flexibly reward shareholders for their stake in the company instead of locking themselves into a steady payment that may prove challenging if their business turns against them (or worse).

But when Goldman Sachs wrote earlier this summer that US companies buying back stock is a “questionable use of cash” with current stock multiples so high, this is probably the sort of thing they had in mind.

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