This should be short. Let me start with some facts.
Franchise value is management’s best estimate of the value per share of the company’s equity. If a management team does not have a firm handle on the value of the company, it has no business buying back stock. Stock should never be bought back over franchise value. If you want to reward shareholders then, issue a special dividend.
I am reminded of how in 2000 the CFO of The St. Paul cleverly bought back shares in the 20s, wisely bought back shares in the 30s, stupidly bought back shares in the 40s, and foolishly bought back shares in the 50s. He was a Johnny One Note, except that he impaired the balance sheet so badly that he became the one of the main causes of why The St. Paul sold out to The Travelers. Price matters with buybacks.
The reinsurance industry is a good example, because well-run reinsurers are simple companies. The book of business is worth book value. The reserves are conservative, which is worth ~0.1x book value or so. Future underwriting profits are worth ~0.2x book value of so.
So the reinsurers have their standard — the companies are worth around 1.3x book value. That gives them a discipline for capital — buying back at under 1.3x book, and issuing special dividends above that.
It is my opinion that most buybacks are a waste, even with the tax advantages, given that the buybacks occur at prices over franchise value, sometimes significantly over. It’s also my opinion that a 2% dividend makes management teams think harder about their shareholders, which is a good thing.
If you get to talk to a management team doing buybacks, ask them if they have a model for what their stock should be worth. If they don’t have one, tell them they should not be doing buybacks, unless they are buying back the stock cheaply. Above franchise value, buybacks are a value destroyer.