Yesterday’s Wall Street Journal featured two articles in the Money & Investing section that go together like peanut butter and chocolate. (And neither one had to do with Hershey.) In the first article, “Heard On The Street’s” Miriam Gottfried penned a feature about comScore’s “squishy math” in the firm’s calculation of achieving stock price targets for special market-based equity awards to the CEO, CFO, chief operating officer and general counsel. The article noted that the “executives received all of their restricted stock awarded under the program ... between March and August of 2015, as comScore’s stock rose following earnings announcements for the fourth quarter of 2014 and the first and second quarters of 2015.” Continuing, the article noted that the company had strong revenue growth in the period, partly attributable to recognition of unusual nonmonetary revenue, and that the stock responded favorably:
“ComScore’s stock price appears to have gotten a particularly big boost from nonmonetary revenue in the weeks leading up to Aug. 23, 2015, when the executives received the last block of shares meant to vest after the stock exceeded a 30-day average of $60. Just a few weeks before, on Aug. 4, comScore had reported results for its second quarter in which revenue rose 14%. Without the nonmonetary portion, revenue would have climbed 3%. After the earnings report, the stock rose to a record of $64.64 on Aug. 17… The share-price rally was just long enough and strong enough that all four blocks of shares granted to the executives qualified for vesting or exercising.”
The “squishy math” comes from the inclusion of weekends and holidays in the 30-day window for the stock price targets to be achieved – it seems kind of weird to include those days in the calculation when the stock doesn’t trade. Without that allowance, at least some of the rewards wouldn’t have been achieved.
Hold on to all that for a moment and switch to the other story on the same page: “Buybacks Pump Up Stock Rally,” by Corrie Driebusch and Ben Eisen. The article confirms what many suspect:
“Shares outstanding in the S&P 500 have fallen this year from year-earlier levels, on track for the first yearly decline since 2011, according to S&P Dow Jones Indices. Companies in the S&P 500 bought back $161.39 billion of shares during the first three months of the year, the second-biggest quarter for repurchases ever…While uneven economic growth, tumbling interest rates and a volatile political climate will likely drive wide market swings in the second half of 2016, portfolio managers said, buybacks appear to be providing support for shares.”
Read the two stories, and you should wonder: comScore may have done some elaborate footwork in getting their share price higher in time for the targets to be attained – but did they just do some good old-fashioned stock buybacks as well? On May 5, 2015, comScore’s board approved the repurchase of up to $150.0 million of the Company's common stock which commenced on May 6, 2015, according to the June 30, 2015 10-Q. That particular authorization was triple the amount of each of the two previous authorizations. From that 10-Q and the September 30, 2015 10-Q, here’s a summary of the buyback activity in the second and third quarters of 2015 (and 2014 for comparative purposes):
|Three Months Ended June 30,||Three Months Ended September 30,|
|(Amounts in millions, except share and per share data)||2015||2014||% Change||2015||2014||% Change|
|Total number of shares repurchased||1,045,140||482,199||117%||823,779||16,100||5017%|
|Average price paid per share||$53.77||$30.68||75%||$55.78||$36.86||51%|
|Total value of shares repurchased (as measured at time of repurchase)||$56.20||$14.80||280%||$45.90||$0.60||7550%|
While the nonmonetary revenue gains may have boosted the stock price and made the vesting price targets achievable, the simple brute force of the buybacks couldn’t have hurt, either. The company was far more active in 2015 than in 2014, and a lot less price-sensitive about the buybacks as well.
The comScore story is symbolic of the markets today. It’s all perfectly legal: shareholders authorized the board they elected to award stock-based compensation packages, and the board doled them out as they saw fit. The board acted within their bounds when they authorized buybacks. The circumstances look awful, though, and they look no better while the company works on an internal investigation of its accounting. Shareholders will wait out the investigation and probably salivate for more buybacks when it’s over – because they’ve been conditioned to accept them as always beneficial.
Stock-based compensation is supposed to be the big “alignment mechanism” between managers and shareholders. You really have to wonder about that when you consider all the buybacks done in the name of shareholder benefit while managers have so much compensation tied up in stock compensation. Like so many other tools, share buybacks can be useful, but they’re not a cure-all. For some interesting thoughts on stock-based compensation plans, consider reading “Fixing the Game” by Roger L. Martin. I don’t think that the book got the wide reception it deserved, but it contains some really thoughtful perspectives on the warped incentives these plans create.