InterDigital Inc (IDCC)

[LTE]

Share Buybacks - I found this article interesting
because it shows how bad the opposite of share buybacks
can be, which is known as dilution. Although Citigroup is
an extreme example, it indirectly shows that a company (like
InterDigital) that can do the opposite of dilution (by consistently
reducing their shares outstaning by buying them back with cash
flow) can be a very good company to own.

Here's an excerpt of the article:

<<Within two years, Citigroup will be as profitable as it was in the years leading up to the financial crisis. So everything is going to work out for long-term shareholders, right?

Citigroup lost $32 billion in 2008. To stay alive, the company had to create equity, and create equity fast. That means creating shares at a time when the stock price had fallen by over 80%, so that the existing shareholders would have to share the wealth with new partners that were entering at once in a lifetime prices, diluting the existing owners substantially.

By the time the financial crisis was over and the final results tallied, almost six new shares got created for every share that had previously been in existence. A share count that had hovered around 500 million grew to 2.8 billion. Things got so bad that Citigroup had to do a 10-for-1 reverse stock split to superficially paper over their own folly; without taking into account dividends, Citigroup’s stock price will have to increase to $500 per share for the old investors to breakeven.

Profits will have to increase ten-fold for Citigroup shareholers to get back to where they were in 2007—in other words, you’re looking at a situation where investors will have to wait until 2037 to get back to where they were in 2007. That’s failure. Sure, it’s better than owning Wachovia, but monstrous one-time share dilution is a crippling event that will most assuredly trash an investment for the rest of your life.

How do you avoid companies that engage in catastrophic share dilution? Although companies can get somewhat creative with how they fail, share dilution usually has three warning signs you can look out for: high debt and/or low capital (this is usually exhibited by banks that have forgotten crisis memories and are lowering their Tier 1 Capital ratios and liquid reserves to try and bump profits to meet some quarterly estimate figure), high-fixed costs (think the old General Motors and retail outlets like Border’s and Barnes & Noble), or debt that proves high in hindsight (this is common in the oil and gas industry, where debt loads that appear manageable to an analyst studying the company suddenly becomes crippling if commodity prices dip for an extended period of time, and the company has to issue shares to stay alive).>>

http://theconservativeincomeinvestor.com/2014/08/27/citigroup-stock-pre-2008-when-investors-can-never-truly-recover/