DJN: BARRON'S: Buyer Beware: The Old Rules No Longer Apply -- For Now -- When
It Comes To Stock Buybacks
By Andrew Bary
Wall Street traditionally has cheered the announcement of stock buyback
programs as a sign that managements are bullish on their companies'
prospects and convinced that their stock prices are undervalued. And many
investors like to follow suit, purchasing shares in companies that are heavy
buyers of their stock because management is putting corporate cash to work
on their behalf. Over the years, this has been a consistently profitable
strategy.
No more. In one more instance of the old rules no longer applying -- for now
-- last year it paid to stay away from companies that pursued aggressive
buybacks. The gloomy table that accompanies this story lists the 50
companies in the Standard & Poor's 500 that bought back the biggest
percentage of their outstanding shares in 1999. Only eight of the 50 beat
the S&P and 33 of the 50 showed negative returns. The weak results have
continued into 2000.
"The popular view is that share buybacks are inherently a beneficial thing
and that they signify good things to come," says Christine Callies,
strategist at Credit Suisse First Boston, who compiled the table using data
from Standard & Poor's Compustat division. "But with many companies last
year, big buybacks were more a reaction to some sort of distress than any
portent of success."
Indeed, one of the trends these days is for companies to announce weak
results and simultaneously trumpet a big buyback in the hope that the
repurchases will soften the blow. That strategy, however, generally doesn't
work.
Callies says the results of the study surprised her because she had thought
that heavy repurchases would have more of an impact on stock performance.
This just shows that operating results and momentum, not financial
maneuvers, are driving stocks these days. The 50 companies on the list
bought back an average of 13% of their market values in 1999 -- a sizable
amount of stock.
US Airways, for instance, repurchased 18 million shares last year, or 20% of
its outstanding stock. But its shares fell 38% during 1999 and, at a recent
price of 20, were down another 38% in 2000. Reason: continued operational
problems. The US Air buyback program now looks like a waste of shareholder
money because the company paid an average price of $45 a share. US Air would
have done better by keeping its cash in the bank.
Allstate's situation likewise shows that buybacks are no substitute for
strong financial performance. The big insurer bought back over $2 billion of
its stock last year at an average cost of $32 a share, but its shares slid
37.5% in 1999 and have slumped further in 2000. Late last week, at a price
of 20 1/2 , they were at their lowest level in four years and down 15% since
December 31. Allstate came under renewed pressure last week after reporting
that its fourth-quarter operating profits fell 15%, to 66 cents a share,
hurt by rising claims costs and competition in its important auto-insurance
business.
One value-oriented portfolio manager tells Barron's that the poor
performance of the heavy share repurchasers in 1999 shouldn't be a surprise
because the stock market last year was dominated by high-multiple stocks
like Microsoft, Cisco Systems, Wal-Mart Stores and General Electric, which
have no buyback programs, or ones that are small in relation to their huge
market values. "Only low-P/E companies can afford to buy back a lot of
stock. But low-P/E stocks did horribly last year." Low-P/E stocks within the
S&P 500 trailed their high-P/E brethren by the largest margin ever in 1999.
The list of heavy repurchasers is studded with low-multiple stocks. Over 20
of the companies trade for less than 10 times projected 2000 profits. The
sectors represented include such out-of-favor groups as industrial
companies, airlines, retailers and insurers. Not surprisingly, the list is
led by two companies in the hot technology sector: Adobe Systems and Seagate
Technology.
Ultimately, the share-buyback programs of many down-and-out companies may be
vindicated if their financial results improve or if investors return to
value stocks. At a minimum, the buyback programs should boost profits per
share for most of the companies by shrinking their shares outstanding.
AMR's aggressive repurchase program last year, for instance, could help its
holders because AMR investors will get proportionately more stock in Sabre
Group Holdings next month when AMR spins off its 83% interest in the airline
reservation company to its stockholders. AMR holders will receive about 0.7
shares of Sabre for each AMR share. With AMR at a recent 55 and Sabre at 47,
AMR holders will receive about $33 in Sabre stock, effectively valuing AMR's
airline operations for just $21 a share, just five times projected 2000
profits.
Many of the companies listed in the table now trade below book value. Loews,
the conglomerate controlled by the Tisch family, has been battered, falling
over 35% in the past year to 52 1/2 , amid concern about the company's
tobacco exposure, given its ownership of Lorillard, the maker of Newport
cigarettes. Yet at its recent price, Loews fetches just 55% of its book
value and well under half its estimated asset value based on its stakes in
CNA Financial and Diamond Offshore Drilling. Allstate now trades just at
book value.
Seagate Technology has risen sharply in the past year, but at a recent 47,
it was trading at a big discount to its asset value. Seagate's stake in
Veritas Software is worth 50% more than the current price of its own shares.
Even if this stake is adjusted for taxes, Seagate's value could be over 70 a
share.
---
No Elixir
Big corporate stock repurchase programs failed to prevent most of these
stocks from dropping last year. The table shows the 50 companies in the S&P
500 that bought back the biggest percentage of their outstanding shares in
1999. Will these stocks do better soon?
1999 Price Market
2/10/00 Perfor- Change P/E Value
Company Price mance in 2000 2000 (millions)
Adobe Systems 911/4 +187.70% 35.70% 48.5 $10,968
Seagate Technology 479/16 +52.92 2.10 59.1 9,907
The Limited 345/16 +48.71 -20.80 16.0 7,367
Cendant 1811/16 +37.54 -29.60 17.5 13,287
Boeing 393/4 +27.40 - 4.10 16.5 37,148
Bear Stearns 397/8 +25.89 - 6.70 7.6 4,752
United Healthcare 577/8 +23.36 - 8.90 15.9 9,824
Times Mirror 563/4 +19.64 -15.30 15.3 3,404
Liz Claiborne 323/4 +19.20 -13.00 9.7 1,936
Columbia-Hca
Health 267/8 +18.43 - 8.30 18.2 15,138
AMR 541/4 +12.84 -19.00 9.4 8,034
C.R. Bard 411/4 + 7.07 -22.20 15.2 2,112
Fortune Brands 253/16 + 4.54 -23.80 10.6 4,133
Cigna 787/8 + 4.20 - 2.10 12.5 14,667
Fmc 501/16 + 2.34 -12.60 7.6 1,531
Textron 6015/16 + 0.98 -20.50 13.1 9,064
Darden Restaurants 157/8 + 0.69 -12.40 12.2 2,086
Autozone 241/16 - 1.89 -25.50 11.7 3,473
Engelhard 16 - 3.20 -15.20 9.9 2,013
Delta Air Lines 4513/16 - 4.20 - 8.00 6.6 6,087
Ryder System 21 - 6.01 -14.10 9.7 1,349
Dun & Bradstreet 255/8 - 6.53 -13.10 14.3 4,123
W.R. Grace 121/2 - 9.96 -11.50 7.3 897
Brunswick 183/8 -10.10 -17.40 6.8 1,687
Cooper Industries 363/8 -15.20 -10.00 9.6 3,425
Toys R Us 113/4 -15.49 -17.90 8.2 2,876
Itt Industries 301/2 -15.88 - 8.80 10.8 2,681
Russell 151/8 -17.53 - 9.70 7.8 500
Torchmark 2015/16 -17.69 -28.00 7.4 2,754
Milacron 131/4 -17.69 -13.80 6.2 490
Maytag 3613/16 -22.89 -23.30 9.4 3,108
Nordstrom 2215/16 -24.14 -12.80 13.2 3,178
Silicon Graphics 97/16 -24.75 - 2.60 N.M. 1,735
Deluxe 2511/16 -24.95 - 6.40 9.8 1,886
Ust 2111/16 -27.77 -13.90 7.4 3,711
Tjx Cos. 171/4 -29.52 -15.60 9.1 5,349
Campbell Soup 265/16 -29.65 -32.00 13.2 11,257
Equifax 2115/16 -31.07 - 6.90 12.4 3,103
Ashland 313/4 -31.91 - 3.60 7.6 2,292
Allstate 201/2 -37.50 -14.80 7.3 16,511
Loews 521/16 -37.50 -14.20 4.9 5,521
Us Airways Group 1915/16 -38.34 -37.80 7.0 1,425
Safeco 2115/16 -42.06 -11.80 12.7 2,852
American Greetings 203/16 -42.46 -14.60 8.4 1,302
Pep Boys 71/16 -43.02 -21.00 7.1 372
R.R. Donnelley 215/16 -43.36 -14.10 8.8 2,695
Manor Care 131/4 -43.36 -17.20 9.5 1,365
Office Depot 14 -55.48 -27.30 13.2 4,609
McDermott Intl 91/4 -63.29 - 2.10 5.6 551
HealthSouth 5 -65.18 - 7.00 7.1 1,931
Sources: Credit Suisse First Boston; Standard & Poor's; Baseline
(END) DOW JONES NEWS 02-12-00
03:19 AM |
