Colin Barr

Following the money in banking, economics, and Washington

Goldman's uphill buyback battle

July 26, 2011: 7:35 AM ET

What if you announced a $10 billion stock buyback and drew a bunch of yawns in response?

That's where Goldman Sachs (GS) finds itself a week after its disappointingly soft second quarter. The torpid reaction is only the latest sign that a weak economy, creaky markets and tightening  capital rules are squeezing the once mighty megabanks.

Ups and downs

Perhaps hoping to ease some of the sting of its rare earnings miss, Goldman said last Tuesday it would repurchase as many as 75 million shares in coming years. The plan isn't novel: Goldman has spent $37 billion on buybacks since 2002 (see chart, right), mostly to mop up stock issued to pay its famously well compensated employees.

But the buyback plan is nothing if not big -- and comes at a time when investors are wondering what sort of money they can reasonably expect to make backing the big banks, too big to fail or otherwise. Goldman's return on equity in the first half of 2011 was at best half the firm's long-term target. That performance goes a long way toward explaining the stock's 15% decline this year, and no doubt puts the firm on its back foot in dealing with some owners.

"We remain focused on generating superior returns for our shareholders," financial chief David Viniar said last Tuesday in announcing the plan on a conference call.

At current prices buying back all that stock would cost around $10 billion. Even for an outfit rolling in it the way Goldman is, that's a good chunk of change.

What's more, buybacks now look like a good deal for shareholders, which isn't always the case. The firm has spent an average of $142 and change buying back shares since 2002 -- well above the firm's book value, a measure of net worth. But with the stock lately trading just above Goldman's reported per-share book value of $131, repurchases may now make sense from a purely financial point of view – which is why Viniar said Goldman could potentially step up the pace.

Yet shareholders' response has been decidedly lukewarm. While Goldman shares are up 6% over the past week, the bounce comes off a low not seen since April 2009, when the financial system was still smarting from the collapse of Lehman Brothers.

And while some boosters say a big blank check for buybacks could finally put a floor under the stock – "we believe downside risk is limited at this time," writes Wells Fargo analyst Matt Burnell – no one is claiming the buybacks are going to get Goldman stock flying again.

"While the repurchase authority now amounts to about 16% of shares outstanding, we would not suggest that this is the net repurchase indicator that we have been suggesting would ultimately be the catalyst to revalue the shares higher," writes Barclays Capital analyst Roger Freeman.

In part that's because Goldman issues so many shares to its workers, who last year took home an average of $430,000, much of it in stock. The firm has spent $3 billion repurchasing almost 20 million shares this year, but its share count has fallen just half as much.

At that rate Goldman's share count will resume declining over coming years, after a brief surge during the crisis as the bank raised capital. A falling share count will boost per-share earnings and book value (a measure of net worth) – but probably not fast enough to make the stock more appealing to risk-averse investors.

Further complicating matters is the role of regulators, who after their winning performance during the credit bubble are rightly intent on keeping the big banks from detonating the economy again. They want the biggest banks to keep more capital on hand. That means giving less to shareholders in dividends and buybacks, at least till the economic uncertainty lifts, which is looking like sort of a long shot at the moment.

The watchdogs must sign off on big banks' dividend and buyback plans in advance, as Bank of America's (BAC) Brian Moynihan found out the hard way. Both Goldman, which lately is stressing how responsible it is to hold lots of capital, and its analyst followers are cautious as a result.

"We believe any such action is likely to occur later in the year or 2012," Freeman writes, and if so "we would expect GS to be an opportunistic buyer of its shares as opposed to mounting a public, defined share repurchase."

Even if the Fed does sign off on a bigger repurchase plan, it's easy to see why Goldman would rather do other things with its money. Unless its shares drop sharply, which the firm would surely see as less than ideal anyway, Goldman adds little to its value by spending money on repurchases – which only makes its declared goal of earning 20 cents on every dollar of invested shareholder money that much more demanding.

But the story of the nonrecovery recovery is one of lots of people with lots of cash and not a whole lot to do with it -- so it's only reasonable to expect more buybacks from Goldman, regardless of how much they move the share price.

"We think we can buy back what makes sense for us to buy back over the rest of the course of this year," Viniar said last week. "We will calibrate that based on performance, share price, the environment and a bunch of other things. But I think we'll be reasonable in our buybacks."

Moving on: This is my last post for Fortune. After almost four years I am leaving to edit banks coverage at the Wall Street Journal. My thanks to the many people at Fortune and CNNMoney who made the blog happen, if you will -- and most of all, of course, to our readers.

  • A new way to bet on Japan

    If you're thinking of rolling the dice on Japan, the betting just got a little easier.

    This month marks the debut of an exchange-traded fund that tracks Japan's most widely followed stock index. The Maxis Nikkei 225 index fund, listed under ticker NKY, began trading last week.

    The launch is noteworthy because it gives investors an easy way to wager on corporate Japan at a time when the world's third-biggest economy is MORE

    - Jul 22, 2011 12:22 PM ET
  • Chewing on Dodd-Frank spaghetti

    Today is Dodd-Frank's birthday.

    Not that you forgot, but now it's time to celebrate with a late lunch of regulatory reform spaghetti, courtesy of the banking team at Deloitte:

    Just 206 items in the 2,000-page-plus legislation are awaiting next steps, the Deloitte chart shows. The thing where the Securities and Exchange Commission has been charged with implementing this massive piece of legislation in a hurry at a time when its budget is being MORE

    - Jul 21, 2011 3:35 PM ET
  • Wells Fargo's big mortgage ripoff

    What do you have to do to get slapped with the Federal Reserve's biggest-ever consumer-protection fine?

    You have to rip off mortgage borrowers by the thousand. The Fed alleges Wells Fargo (WFC) did just that during the housing boom, bilking "possibly more than 10,000" out of sums reaching as high as $20,000 by slapping them with high-cost loans when they would have qualified for cheaper ones.

    The Fed fined Wells $85 million MORE

    - Jul 20, 2011 5:41 PM ET
    Posted in: , , ,
  • The Fed's scary doomsday drill

    Hoping Aug. 2 will come and go uneventfully? Read Wednesday's comments from Philadelphia Fed President Charles Plosser and weep.

    Plosser (right) says the Federal Reserve is gearing up for a possible U.S. default should the loons in Congress fail to raise the debt ceiling. He stresses in an interview with Reuters that he isn't predicting this baleful outcome, but he doesn't underplay how quickly a default might spin out of control.

    The MORE

    - Jul 20, 2011 5:05 PM ET
    Posted in: , , ,
  • Bernanke's pain point: a 17% stock drop

    How low would stocks have to go to bring Ben Bernanke off the sidelines?

    A 17% drop in the U.S. blue chips would probably suffice, say big fund managers surveyed this month by Bank of America Merrill Lynch.

    The S&P 500 would have to hit 1100 to get the Fed buying more bonds to prop up domestic demand for goods and services, according to the survey of 265 managers overseeing nearly $800 MORE

    - Jul 20, 2011 9:52 AM ET
    Posted in: , , , , ,
  • Goldman slumps on 'disappointing' quarter

     Goldman Sachs stock fell to its lowest level since April 2009 after the bank admitted it had a "disappointing" second quarter.

    The New York-based investment firm made $1.09 billion, or $1.85 a share. That's up from the year-ago $613 million, or 78 cents a share, but those numbers were hit by a $550 million legal settlement and a $600 million hit on the U.K. bank tax. Revenue at Goldman (GS) fell 18% MORE

    - Jul 19, 2011 8:23 AM ET
    Posted in: , ,
  • BofA posts $8.8 billion loss

    Bank of America posted an $8.8 billion second-quarter loss as the biggest U.S. bank by assets tries to put its disastrous acquisition of Countrywide in the rearview mirror.

    The Charlotte-based bank lost 90 cents a share in the quarter, reversing the year-ago profit of $3.1 billion, or 27 cents a share. Revenue, hit by $13 billion in mortgage litigation costs, plunged 54% from a year earlier to $13.5 billion.

    Excluding the mortgage MORE

    - Jul 19, 2011 7:32 AM ET
  • Tides of March: Did U.S. economy crest this spring?

    Did the U.S. economic expansion wilt this past spring, allowing another recession to take root?

    Gluskin Sheff economist David Rosenberg believes it did. It isn't just that the unemployment rate bottomed out in March at 8.8%. Rosenberg notes that real disposable income, household employment, real business sales and manufacturing output all peaked that month.

    Skepticism about U.S. growth is catching lately, what with Goldman Sachs and Bank of America both cutting their MORE

    - Jul 18, 2011 2:16 PM ET
  • Foreigners still buying U.S. bonds

    Foreigners continued to buy American in May.

    Overseas investors bought $45 billion worth of U.S. stocks and bonds, the government said Monday in its monthly Treasury International Capital report. That's up from $31 billion in April and above the $40 billion net purchase forecast by economists.

    Among the big purchasers, as usual, were China, whose official stock of U.S. Treasury holdings rose by $7 billion to a globe-topping $1.16 trillion, and Japan, MORE

    - Jul 18, 2011 9:36 AM ET
    Posted in: , , ,
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.