Companies are on a record-setting pace in announcing share repurchases this year and are touting how investors will benefit.
NEW YORK — Stock buybacks are all the rage these days. Companies are on a record-setting pace in announcing share repurchases this year and they are out in force touting how investors will benefit.
Buybacks may sound like a great deal, but they don’t always boost shareholder value, as companies promise.
Often, companies shell out cash to repurchase stock and end up losing money in the process.
Consider Lexmark International. The printer company has bought back 12.6 million shares in 2005 at a total cost of $867 million. That breaks down to an average price of $68.83 a share.
The stock is trading in the $43 range, however, so those purchases apparently weren’t a deal for the company and failed to do much to boost shareholder value, at least through this round of repurchases.
Many companies are working hard to convince investors that buybacks are the best use of cash accumulated on their corporate balance sheets. Buybacks usually give the stock a quick boost and they leave fewer shares outstanding, which means each remaining share counts for a greater piece of the corporate pie.
Buybacks for companies in the Standard & Poor’s 500 stock index are expected to easily exceed the highs of 2004, when repurchases totaled $197 billion.
This year, there were $163 billion in buybacks in the first half of the year, and the pace remains strong, according to S&P.
Just look at the recent news coming from beleaguered Time Warner, which said it would more than double its repurchase plan from $5 billion to $12.5 billion to meet shareholder demands to lift its slumping stock.
Microsoft, Intel buybacks
Microsoft said last month it will double the pace of it stock-buyback program, spending $19 billion during the next year.
And chip maker Intel announced Thursday it would buy back up to $25 billion in common shares.
Youth-apparel retailer American Eagle Outfitters has also increased its buyback plans, as has computer giant IBM. Wireless-technology developer Qualcomm is launching a new $2.5 billion repurchase plan, and Xerox plans to repurchase up to $500 million in common stock — its first buyback program in eight years.
But there are plenty of downsides to buybacks, too. Companies can use them to mask a slowdown in earnings growth, or they can take on massive debt to pay for their repurchases.
Often, the corporate dollars that go toward buybacks could be better spent somewhere else.
Given the corporate spin about boosting shareholder value, if companies really wanted to do that, they would be more generous by doling out dividends that put money directly in investors’ pockets.
Much attention in the coming months will be paid to DuPont and how its shareholders will ultimately fare from its massive repurchase program.
Called an accelerated buyback, DuPont bought about 75.7 million shares from the investment firm Goldman Sachs on Oct. 27 for $39.62 a share. During the next nine months, the investment bank will buy an equivalent number of shares in the open market.
Since some of the shares were already bought and off the market, the move immediately boosted earnings per share — clearly pleasing shareholders who saw the stock rise. Deutsche Bank estimates the buyback will add to earnings by 20 cents in 2006.
But there is a catch.
At the end of the nine months, DuPont may get from Goldman or be required to pay Goldman a price adjustment based on the difference between the initial buyback price and what the stock does during the repurchase period, using a volume-weighted average.
Translation: DuPont could be stuck with a hefty bill should its stock price rise dramatically.
In addition, an accelerated buyback program impairs financial flexibility far more than a traditional buyback, mainly because it’s cash out the door that can never be retrieved, notes Gimme Credit bond analyst Carol Levenson.
Such concerns caused Standard & Poor’s, Moody’s and Fitch ratings services to lower their debt ratings for DuPont when the buyback was announced.
“The stock buyback program is substantial, representing about one-eighth of the company’s outstanding shares at the current market price, and, in our view, a permanent shift to less conservative financial policies,” said Standard & Poor’s credit analyst Cynthia Werneth.
All this is important for investors to keep in mind. Sure, buybacks often can be a winning strategy, but that certainly isn’t the case all the time.