Stock buyback binge poised to hit record
MANY FIRMS USE SHARES FOR EMPLOYEES EXERCISING OPTIONS
By Mark Schwanhausser
Mercury News
Led by the technology industry, the nation's biggest companies bought their own stock at a record pace last year, mostly to provide shares to employees exercising billions of dollars worth of stock options.
But write that record down in pencil, not permanent ink. Standard & Poor's said Thursday that the buyback binge is almost certain to be even bigger in 2005, adding to the estimated $1.2 trillion that companies in the S&P 500 index have spent on buybacks over the past decade.
``The only thing that could really stop it is a meltdown in the market,'' S&P analyst Howard Silverblatt said.
The trend focuses attention on a question that has taken on growing importance for investors in Silicon Valley companies that have doled out options liberally: Have companies been too generous sharing the pie with workers?
The answer could influence how investors value tech stocks under looming stock-option accounting rules. Starting June 15, companies must subtract the cost of stock options from stated profits, rather than just report the costs in financial footnotes. The change will erase billions of dollars in profits in Silicon Valley alone.
Standard & Poor's said Thursday that its analysis of recent securities filings of companies composing the S&P 500 index found that:
• Spending on buybacks jumped 51 percent in 2004 -- and 72 percent in the fourth quarter.
• Information technology companies were the biggest buyers, accounting for 26 percent of the money invested. That's nearly twice as much as any other sector.
• IBM topped the charts by spending $51 billion over a decade, followed by Intel ($41 billion) and Microsoft ($37 billion). Hewlett-Packard and Oracle ranked ninth and 10th, with $19 billion each.
Companies sometimes buy back stock to pay for mergers and acquisitions. But most buybacks have been used to shrink the pool of outstanding shares or to settle up when employees exercise stock options.
Shareholders stand to gain when companies retire the stock they buy. Reducing the number of shares boosts the value of each remaining share. In practice, however, most companies don't that.
Instead, they hand the repurchased shares to employees when they exercise stock options. Analysts estimate at least two-thirds of the shares are used for this purpose.
Some investors gripe that this is a transfer of wealth from shareholders to employees. Rather than buying back stock, companies could use their cash to pay dividends, for instance.
Tech companies generally haven't paid dividends. But Santa Clara-based Applied Materials, the world's biggest maker of equipment for building semiconductors, flexed its financial muscle by declaring in March that it will pay a 3-cent dividend and buy back up to $4 billion of stock over the next three years.
Silverblatt said about one out of three companies used buybacks to reduce the pool of outstanding shares in the third quarter of 2004, but that rate fell off in the fourth quarter. The first quarter of 2005 could be telling because that's when employees tend to exercise more options for a variety of reasons, including tax strategies.
The issue is timely because companies are flush with cash, Silverblatt said. S&P 500 companies were sitting on $619 billion in 2004, more than double the $260 billion in 1999. The tax break for companies that transfer profits from overseas operations will only pad the bank account.
Silverblatt said investors are pleased that companies have lots of cash but want to know how it will benefit them.
``Investors have a right to know,'' he said.
Contact Mark Schwanhausser at (408) 920-5543 or mschwanhausser@ mercurynews.com.
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