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Nickelless
Administrator
USA
5580 Posts |
 Posted - 10/17/2008 : 23:52:02
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(Fortune Magazine) -- Last month, Microsoft announced it was going to spend $40 billion buying back its own stock. Traditionally, that would have meant a payday for its investors. With Microsoft using its own spare cash to reduce the number of outstanding shares, earnings per share should have improved, and the stock price should have ticked upwards.
But a funny thing has happened since the announcement: Microsoft's stock got a slight bump, then quickly tumbled.
Microsoft (MSFT, Fortune 500) is not alone. Nike (NKE, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500) have also recently announced buybacks that fizzled (but what hasn't in this market?). This has prompted shareholders and CFOs to wonder whether buybacks are another false god of the bull market or merely collateral damage of the credit crisis.
"Buybacks were almost as good as firing 1,000 people," says Howard Silverblatt, senior index analyst at Standard & Poor's.
Between 2003 and 2007, the amount of cash S&P 500 companies spent on buybacks nearly quadrupled, from $135 billion to $590 billion. The higher the market rose, the more shares companies bought. The peak of this "buyback bubble" occurred in the third quarter of 2007, when the Dow was at 14,000.
During that time financial services companies including Bear Stearns, Lehman Brothers, and Freddie Mac (FRE, Fortune 500) were buying up their own stock like crazy when their spare cash might have been better spent deleveraging their balance sheets. "It was bizarre how companies were repurchasing at such high levels," observes John Graham, a finance professor at Duke University who surveys CFOs on their repurchasing plans.
Take the case of Merrill Lynch (MER, Fortune 500). In February 2006, Mother Merrill, flush with cash, announced plans to buy back $6 billion in stock, more than doubling its previously announced repurchase plan.
At the time, Merrill's stock price got a nice boost, rising almost 2% that day - and more than 20% for the rest of the year, to $89. If you sold then, the buyback treated you right. But any long-term shareholder got trounced: Since then, Merrill has lost 80% of its value and agreed to be taken over by Bank of America (BAC, Fortune 500).
So how should investors view buybacks in today's tempestuous market? The irony is that this might be the time to have any real faith in them. Right now only companies in decent shape - generating real, secure cash flow and not dependent on the debt or capital markets - can afford to buy back stock, and this is a chance to get the stock cheap.
"Look at Microsoft. The Yahoo deal didn't work out. Now it's got all this cash, and it's looking for a place to put it. So this is like Microsoft saying it thinks that it is the best investment out there," says Art Hogan, chief market analyst with Jefferies & Co. "The message you are sending out is you think your stock is a bargain."
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jadedragon
Administrator
Canada
3788 Posts |
Posted - 10/18/2008 : 00:21:52
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Ya, buybacks create demand for a stock that does not have much demand. Basically they thin out all the shareholders who are not happy without replacing them. A very tax adventagous way to selectively distribute cash to the investors.
The companies that spent money on buybacks when the stock price was high are just an example of wasteful spending. Companies that do buybacks today will support thier undervalued share price nicely. The article suggests that buybacks are not working now, but really how can a company stop a the storm of the last few weeks? |
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Nickelless
Administrator
USA
5580 Posts |
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fb101
Administrator
USA
2856 Posts |
Posted - 10/18/2008 : 07:42:41
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quote:
With Microsoft using its own spare cash to reduce the number of outstanding shares, earnings per share should have improved, and the stock price should have ticked upwards.
There are 2 kinds of buybacks. Type 1 takes stock off the market diminishing supply and usually causes an uptick in stock price, but does not improve Earnings per share (EPS).
Type 2 also retires the stock and it no longer gets allocated earnings and hence is not counted in the EPS causing EPS to improve.
Most buybacks are type 1, and in the long run do not significantly improve EPS.
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Lemon Thrower
1000+ Penny Miser Member
USA
1588 Posts |
Posted - 10/20/2008 : 05:29:06
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| all buybacks take shares out of the share count. this reduces the denominator when calculating EPS. this is why corporations do it. a one time dividend is a one-time effect. removing shares from the eps calculation benefits future periods also. btw, for GAAP EPS purposes they go by the weighted average number of shares outstanding during the quarter, so the sooner they buy the shares the better. |
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Stock buybacks lose their mojo
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