USA Today: Corporate Stock Buybacks Offer Little Value, Like a 'Sugar High'

Monday, 02 Jun 2014 07:15 AM

By John Morgan

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Stock buybacks by big American companies are near a historical peak, but the practice appears to do little to improve their underlying operations and robs them of money for research and future growth. USA Today's John Waggoner calls stock buybacks a "sugar high."

S&P 500 companies bought back an estimated $160 billion in stock in the first quarter, according to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. That would lag only the $172 billion in the third quarter of 2007 — shortly before the worst bear market since the Great Depression.

Accordng to Waggoner, companies typically don't buy their own stocks because they think the stock is undervalued.

Editor's Note:
Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

In fact, Warren Buffett chimed in on the topic in a 1999 investment letter: "Repurchases are all the rage, but are all too often made for an unstated and, in our view, an ignoble reason: to pump or support the stock price."

Stock buybacks can boost a company's share price in more than one way. "Analysts look at a company's earnings per share. If a company's earnings are the same and the number of its shares fall, the stock magically looks a bit less expensive than it really is," Waggoner noted.

Another corporate incentive for buybacks is that a pumped-up share prices makes the stock grants and options held by senior executives more valuable.

Higher share repurchases tend to happen when stock prices are already high, according to Waggoner.

William Lazonick, a professor at the University of Massachusetts at Lowell who has studied the stock buyback phenomenon, said companies that depend on research and development for future earnings waste their money by buying back stocks.

Hewlett-Packard, for example, spent $11 billion on buybacks in 2010, $10.1 billion in 2011 and then recorded a $12.7 billion loss in 2012.

If HP was not drawing down its cash by buying their own stock, companies could use it to invest in people, plants and equipment, or even use to acquire other companies, Lazonick said.

"Buying back stock is more of a sugar high than anything else," Waggoner concluded.

Washington Post columnist Steven Pearlstein wrote: "It would be one thing if most of these stock buybacks were paid for out of the trillions of dollars in cash now sitting on corporate balance sheets. But as it happens, most of them have been paid for by near-record levels of corporate borrowing."

Pearlstein cited an estimate from Paradarch Advisors that of the $3.4 trillion in debt assumed by nonfinancial corporations since 2009, approximately 87 percent has been distributed to shareholders in the form of dividends and stock buybacks.

Some recent heavy buyers of their own shares include blue chips such as Boeing, Caterpillar, 3M Co. and Microsoft, Pearlstein noted.

ZeroHedge.com singled out IBM as having one of the most visible buyback strategies, including $8 billion in the first quarter of 2014.

Since 2012, IBM has spent approximtaley four times as much cash on stock buybacks as it has on capital expenditures, Zerohedge said.

"Starting in 2012, IBM generated enough cash to where the incremental debt-funded buybacks did not result in a major change in the company's net leverage, but starting about a year ago, organic cash flow declined so much that IBM had no choice but to see its net debt surge," ZeroHedge noted.

"Considering that for IBM its balance sheet is far more precious than its income statement and what its stock does over the near term, especially since its price per share is just shy of all time highs, we can only assume that IBM will promptly slow down if not end outright, its stock buyback gimmick routine," ZeroHedge predicted.

Editor's Note: Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

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