Where Are All the Buybacks?
Thursday May 3, 7:50 pm Eastern Time
TheStandard.com
By Eric J. Savitz
Stock market bulls would have you believe that the huge Nasdaq sell-off has made share prices cheap. And there are no doubt some actual bargains. But there are still troubling signs. For instance: If stocks have been discounted so dramatically, why aren't more companies buying back their own shares?
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Certainly, that's what companies did following previous market slides. Consider, for instance, the aftermath of the 1987 stock market crash. Seeking both to boost investor confidence and to take advantage of sharply lower stock prices, many companies announced stock repurchase plans -- that is, their boards authorized the companies to dive into the market and buy back some of their own shares. In 1986, with stocks on the rise, companies announced 240 buyback plans. In 1987, the number of buybacks soared to 885. In 1990, another weak period for stocks, the same thing happened: Buyback announcements jumped to 1,009 from 635 in 1989.
The slide in 2000 and 2001 isn't following the pattern. Indeed, buybacks have dried up. Last year, according to Thomson Financial, there were 792 buyback announcements, down from 1,512 in 1999. And this year is on pace for an even lower total, with only 179 announced for the year to date. And that is discouraging.
Buybacks are generally good news for shareholders, for several reasons. First, they reduce the number of shares outstanding, which boosts earnings per share and, in theory, stock prices. Second, for companies with option-oriented employee-compensation plans, buybacks help offset the dilution that results from shares issued in employee stock-option and stock-ownership plans. And third, they provide extra buying power in the stock market in the form of the company's own cash.
Alas, corporate boards seem largely uninterested in buying back their stock right now, and that is particularly true in the tech sector. Thomson Financial data shows that 14 tech companies announced buybacks in April; that compares with 12 last April, not long after the Nasdaq peaked. In the first quarter this year, with the markets headed south, tech companies announced 37 buybacks, up just a bit from the 29 announced during the first quarter of 2000 when stocks were soaring, but down from 50 announcements in the fourth quarter.
Some investors have taken solace in buyback announcement from some big-cap tech companies like IBM and Oracle. But it's a false hope. In truth, these companies are mostly buying back their stock so that it can be reissued to employees exercising stock options. For instance, Oracle late last month announced plans to buy back up to $3 billion of its shares. (As is always the case for these plans, the shares are to be purchased in the open market, at times and prices to be determined.) The announcement was cited at the time as a reason for an uptick in Oracle's stock price. But alas, anyone looking at that announcement as a sign that Oracle thinks that its stock is undervalued is misinterpreting the news.
Stephanie Aas, of Oracle's investor relations department, says there was no message intended about Oracle's share price -- the company simply wants to continue to avoid increasing the number of shares outstanding -- and therefore reducing earnings per share -- from the exercise of employee stock options. Oracle had used up its previous authorization, which dates back 1999, so the board approved another round. Aas notes that Oracle has bought back just over 1 billion shares since 1992, enabling the company to have zero dilution from its options program.
The situation is similar at IBM, which announced a $3.5 billion authorization late last month. For IBM, it's the continuation of a repurchase plan that started in 1995. Through 2000, the company had bought back $38.9 billion of its stock. The purchases have more than offset stock issued for employee stock options; IBM has actually reduced its shares outstanding since 1995, when a split adjusted 2.3 billion shares to 1.8 billion shares. That's all good for shareholders, but it doesn't imply anything about the current valuation of IBM's stock.
There are some obvious reasons for the lack of stock-repurchase plans. In order to spur a buyback, several conditions need to be in place. One, the company has to have some level of confidence that the slide in its stock price is unjustified. Two, the company has to have some cash on hand. And three, it must be convinced that buying back shares is a good use of that cash.
The problem is, this particular stock market slide comes at a time when fundamentals, especially in the tech sector, have rapidly deteriorated. Companies are cutting staff, closing offices and generally struggling to cut costs and conserve cash. Some of the hardest-hit stocks are fighting to stave off creditors and stay afloat. This highlights how the latest market slide is different in many ways from some of those in the past: It has been accompanied by a collapse in corporate earnings. The unfortunate bottom line is that even though corporate managers might not be happy about their weak stock prices, not many have the cash on hand to do anything about it. |
