Tags: US | Buybacks | on | Rise

Experts: Firms Boost Dividends But May Fear Slow Growth

Tuesday, 15 Jun 2010 07:23 AM

 

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Companies that have lots of cash but don't want to go on buying sprees or ramp up production are increasingly buying back their own shares this year, often announcing the plans in tandem with dividend increases.

The moves can bolster a stock's price by cutting supply. It also can boost the key Wall Street metric of earnings per share because the company's profit is measured against fewer outstanding shares.

By reinstating programs frozen during the recession or by starting new buybacks companies are indicating they feel comfortable cutting their record cash levels.

But the trend also indicates companies expect slow growth, said Marc Pado, a market strategist at Cantor Fitzgerald.

"In a fast-growing economy you grow by acquisitions or expansion," Pado said.

Buying back shares is a "medium road" for companies wanting to unload cash because they can't earn much holding onto it, he said.

As of June 4, 310 companies had said they planned to buy back up to $173.3 billion worth of stock for far in 2010, according to figures released Monday by deal-tracking firm Dealogic. By the same date in 2009, 253 companies had planned $20.3 billion in stock buybacks, Dealogic said.

Using some of the cash reserve on corporate balance sheets to buy up shares "does suggest a little bit of improvement in sentiment," said Jack Ablin, chief investment office of Harris Private Bank.

Buybacks also can reduce the threat of a takeover and prevent earnings per share from weakening when employees and others exercise stock options.

Buyback programs collapsed as the financial crisis took hold in late 2008 because companies hoarded cash as their stock prices plunged.

Many companies are announcing buybacks in tandem with a boost in quarterly dividend payments to shareholders, another signal of confidence about future earnings levels.

In mid-March, for example, PepsiCo Inc. raised its annual dividend 7 percent and approved up to $15 billion in share repurchases through 2013.

The move "reflects continued confidence in the growth of our business and our commitment to providing strong cash returns to our shareholders," CEO Indra Nooyi said then.

Wal-Mart Stores Inc. announced a $15 billion buyback plan this month.

On Monday, three companies announced repurchase plans, including drug store chain CVS Caremark Corp., whose stock has dropped during a dispute with rival Walgreen Co.

CVS said it would buy back up to $2 billion of its stock.

During the first quarter, nonfinancial businesses held $14.22 trillion in financial assets, the Federal Reserve said last week.

Cash and other paper accounted for $1.84 trillion of that — the highest quarterly amount on records going back to 1952, said Fed spokeswoman said Susan Stawick.

That's a 6 percent jump from a year earlier, when total the companies' financial assets were $13.44 trillion, with the subtotal for cash and other paper up 26 percent.

During the recession, companies laid off workers, idled factories and boosted productivity.

As the economy improves, their net income is rebounding thanks to improved revenue and continuing lower costs.

As a result, companies have "plenty of money," said Howard Silverblatt, an S&P analyst.

The more than $55 billion that companies actually spent on buybacks during the first quarter was 80 percent more than a year earlier, Silverblatt said.

Most of that spending was intended to keep the number of shares outstanding constant as companies issued options to pay employees, he added.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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