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.

  • 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: , ,
  • Goldman says recession risk rising

    A recession is "clearly a possibility," the bank that until recently was America's biggest booster said in cutting its economic growth forecasts yet again.

    Goldman Sachs, which just seven months ago was the loudest voice for a stronger than expected U.S. recovery, now expects U.S. output to creep ahead at a snaillike 1.5% clip in the second quarter and a less than vigorous 2% in the third.

    Friday's call stands as quite a comedown MORE

    - Jul 18, 2011 6:38 AM ET
  • Bankers skate again in SEC-JPMorgan deal

    The government took another whack at the banks Tuesday, but individual bankers continue to skate by unscathed.

    The Securities and Exchange Commission scored a $154 million settlement with JPMorgan Chase (JPM) over its misleading bond-sales practices during the bubble.

    In a replay of the Abacus case against Goldman Sachs (GS), the SEC charged JPMorgan Chase with admitting* it misled investors by failing to mention that the securities they were buying were being MORE

    - Jun 21, 2011 3:51 PM ET
    Posted in: , , , ,
  • Crude oil whiplash? Blame the banks

    Want to see the plump financial tail wag the scrawny economic dog? Look no further than the wild, wooly oil markets.

    Crude futures for delivery next month tumbled $4 and change in New York Wednesday, marking their biggest decline in a month. The recession obsession being what it is, the selloff was taken as confirming poor prospects for U.S. growth and rising risks that Europe will melt down.

    But why now?

    But what Wednesday's plunge actually shows MORE

    - Jun 16, 2011 6:37 AM ET
  • Goldman bumbles into bribery swamp

    Having failed to get the banks for anything else, can the authorities now get them for bribery?

    We may soon find out. The Securities and Exchange Commission is looking at whether Goldman Sachs (GS) and other big banks broke bribery laws in dealing with Libya's sovereign wealth fund.

    The question in this case is whether Goldman violated the Foreign Corrupt Practices Act by initially agreeing to pay a fee that would have been MORE

    - Jun 9, 2011 10:13 AM ET
    Posted in: , ,
  • New hound on the Goldman trail

    Anyone who isn't investigating Goldman Sachs, please stand up.

    The Manhattan district attorney's office joined the fray Thursday. Bloomberg reported Cyrus Vance Jr.'s office has subpoenaed Goldman (GS) over its alleged bubble-era habit of ripping off hapless clients on dodgy mortgage bond deals.

    The subpoenas stem from the report Sen. Carl Levin issued six weeks ago, documenting the bubble-era abuses at Goldman and Deutsche Bank (DB). The Securities and Exchange Commission and MORE

    - Jun 2, 2011 11:32 AM ET
  • Goldman downgrades U.S. growth again

    How tepid is the U.S. economy?

    So lukewarm that economists at Goldman Sachs last week cut their economic growth forecast for the second time in a month, only to warn a few days later that "we already see downside risk to that estimate."

    Goldman now sees the U.S. economy struggling to limp forth at a 3% pace in the second quarter, down from 3.5% just three weeks ago and 4% at the MORE

    - May 31, 2011 5:18 AM ET
    Posted in: , ,
  • The silver lining in falling bank stocks

    Summer is a month away yet, but the financials are already wilting. If we're lucky, this trend is just  getting started.

    Bank stocks fell for the second straight day Monday, as Bank of America (BAC) and Morgan Stanley (MS) sank within 5% of their 52-week lows. Another big trading bank, Goldman Sachs (GS), rose modestly but remains just 6% above its low of the past year.

    The selloff is the latest sign MORE

    - May 23, 2011 11:41 AM ET
  • Why oil prices will spike again soon

    How long till the next oil shock?

    Energy prices have been coming down this spring as fears of a Middle East blowup fade. But persistent global demand, tepid supply growth and easy money mean it may not be long till the next damaging spike, Goldman Sachs economists say.

    Oil prices could surge again by the end of 2012, economists Jan Hatzius and Andrew Tilton wrote in a note to clients this past MORE

    - May 23, 2011 6:37 AM ET
    Posted in: , , , ,
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by VIP.