Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: John Chen who wrote (140676)	3/17/2002 1:42:06 PM
From: H James Morris	Read Replies (1) \| Respond to of 164684

John, not all people believe in companies buying back their shares. They'd rather see the cash. >>March 17, 2002 For the first time, share repurchase programs are more popular with companies than dividends – and one reason is that in 1982, the government erased the ethical taint from share buybacks. That's one major conclusion of a new study on share repurchases by Roni Michaely of Cornell University and Gustavo Grullon of Rice University. The authors show that expenditures for share repurchase programs zoomed from 4.8 percent of profits in 1980 to a staggering 41.8 percent in 2000. Over those years, share repurchase expenses were growing at 26.1 percent a year, while dividends were going up only 6.8 percent annually. The authors point out that in countries such as Austria, Norway and Israel, open-market share repurchases are considered stock price manipulation, and are prohibited. In this country, this view is held by cynics such as myself, but the Securities and Exchange Commission now smiles on them. It took awhile. The SEC considered rulings to facilitate buybacks in the go-go 1960s, then held off, wisely. It considered such moves again in 1970, 1973 and 1980. Finally, in 1982, it adopted rule 10b-18, which gives a safe harbor to companies buying back their stock. Until then, companies had been reluctant to make such moves, fearing that buybacks – which artificially boost earnings per share – would be considered a violation of anti-manipulation statutes, say the authors. Rule 10b-18 wiped that fear away. The rush was on. Before 10b-18, the inflation-adjusted average annual expenditure for share repurchases was $5.5 billion. After 10b-18, it was $62 billion. Proponents point out that there is a tax incentive for buybacks: Capital gains are taxed at more favorable rates than dividends. The Tax Reform Act of 1986 drastically reduced the relative tax advantage of capital gains, but it didn't slow down this freight train. My conclusion is that it didn't slow it down because there was another factor coming on strong: earnings massaging. Wall Street would project that X Co. would earn 18 cents a share in the upcoming quarter; X Co. would then do anything in its power, including cooking the books, to make 19 cents. One method by which that has been done is stock buybacks. I interviewed Michaely, a professor of finance at Cornell. "Yes, companies have used them (stock buybacks) to massage earnings; I could live with this (conclusion). A significant portion have occurred because they are trying to pull the wool over investors' eyes," says Michaely. "We are interviewing dozens and dozens of CFOs (chief financial officers). They all mention earnings per share" as a motivation for buying back stock, he says. But he also thinks it was a matter of ennui, of stultifying bureaucracy, that inhibited companies from engaging in massive buybacks for so long. "You test the water, then go full body into it," says Michaely. So earnings smoothing and massaging is only part of the story, he says. Other explanations come from a paper he did with a Cornell colleague, Yaniv Grinstein. It concludes that on average, the big Wall Street institutions increase their holdings in firms that repurchase more shares, and decrease their holdings in firms that pay more dividends. Institutions prefer dividend-paying firms to those not paying a dividend, but prefer low-dividend stocks to high-dividend ones, according to this study. (That's not surprising: The high-dividend stocks these days are real estate investment trusts, some utilities and often-shaky industrial companies.) But the evidence reveals that institutional ownership is higher for firms repurchasing their shares than for those not doing so, according to this paper. Since companies spend much of their time courting Wall Street institutions, the real power in the investment world, it follows that dividends will get less attention than stock buybacks. But there is a question of how long this will last: As Geraldine Weiss of La Jolla's Investment Quality Trends points out, dividends represent real money. Companies have to generate cash to pay them. In this market, dividends are already making a comeback. uniontrib.com

To: John Chen who wrote (140676)	3/17/2002 1:42:32 PM
From: Ted The Technician	Read Replies (1) \| Respond to of 164684

John, I too am paranoid, but I didn't find any references to officer loans within the recent 10k or 2001 Proxy statement. You might be referring to WCOM whereby the CEO was provided a loan from WCOM to cover his margin call that was created as a result of the drop in WCOM price. Loans from companies to officers are traditionally "forgiven" by the company.