Briefing.com wrote an opinion on stock buybacks today:
STOCK BUYBACK PROGRAMS. If a company can't keep its stock price up
with a good profit report, perhaps buying some of its own stock will
help. There have been a large number of companies announcing stock
buyback programs recently. This makes some sense given the decline
in stock prices. Many large companies, such as IBM, have had stock
buyback programs in place for a long time. Lately, a lot of smaller
companies have also announced programs. After the close Wednesday
and before the open Thursday, the following companies all announced
buyback programs: Xilinx (XLNX 36 15/16), Apex Mortgage Capital
(AMX 9 1/8), Freedom Securities (FSI 13 1/8), and Omega Protein Corp.
(OME 6 1/2). The list of companies with authorizations is now a very
long one. Buyback programs are intended to increase demand and
therefore boost the stock price. They by no means guarantee a floor
for the stock, however. Buyback programs are typically only
authorizations by the board to buy back stock from time to time.
Just because the press release mentions 1,000,000 shares does not mean
the company will actually buy back that many. The question also has to
be asked: if the company's prospects are good, how come they can't invest that money in the business? Isn't that why they sold stock to the public in the first place, to invest it in the business? Do they really have that much free cash flow to invest in their own stock rather than in their business plan? The reduction in capital for investment (or cost of borrowing funds for the program) often offsets the benefit of improving earnings per share as a result of fewer share outstanding. Many times, a stock buyback program is simply a last ditch effort to shore up the stock price that does nothing to improve business conditions for the company, but may reduce its available capital. There are a lot of companies announcing programs these days as stock prices are down. The press release of a buyback program can sometimes provide some short-term boost to the stock price, and sometimes can provide steady support for a stock. They are no replacement, however, for good, steady profit growth. |
