Investors call for share buybacks to boost price of stagnant stocks
The squeaky wheels are getting oiled.
Time after time since 2003, when companies began to recover from the bursting of the dot-com bubble and a rash of corporate scandals, investors have been surprised by the strength of earnings and by the cash piling up in corporate coffers as a result.
In the fourth quarter, analysts polled by Reuters Estimates expect earnings for companies in the Standard & Poor's 500 index to grow by 12.4 percent over the year-earlier period. That would make it the 10th quarter in a row of double-digit growth -- an unprecedented run.
But that earnings strength hasn't made for stock-market strength. The market's lackluster performance this year has made many investors anxious for companies to do something about stubborn stock prices. A common complaint: If companies are having such a hard time spending their earnings on new projects and such, they should give it back to shareholders, either by buying back stock or boosting dividends.
With fewer shares to slice up the earnings pie, the earnings-per-share figure rises. That makes each share more valuable and can lead to a higher stock price. Higher dividends also fuel share prices.
Many companies have heeded the call. In a recent conference call, Tyco International Ltd. Chief Executive Edward Breen told investors that the company has spent $4.2 billion on a share-repurchase program begun last year. The following day, General Electric Co. said that it would sell most of its insurance unit to Swiss Reinsurance Co. in a deal valued at $6.8 billion and that the proceeds would help it boost share repurchases and dividends.
By the estimate of Standard & Poor's market strategist Howard Silverblatt, companies in the S&P 500 spent about $245 billion on share repurchases in the first three quarters of this year, topping the record $197 billion they spent in all of 2004. Because share repurchases are outstripping share issuance, there have been meaningful reductions in total shares outstanding at some companies.
Meanwhile, dividend payouts should come in at about $200 billion this year, said Silverblatt, up from $181 billion last year.
Still, some investors are keen to see companies do more.
Tilson believes a company should buy back shares only when its stock is trading at least 20 percent below its intrinsic value.
If a company buys its stock when it is expensive, he says, "the only people who benefit are the people whose shares are being repurchased."
The problem? The "intrinsic values" that various valuation models spit out for stocks depend on the numbers that get plugged into them. The faster someone thinks a company will grow, or the lower its risk of failure, the higher its value will be. Both company managers and their shareholders are predisposed to believe that growth will be better, and that risk will be lower, than may actually be the case.
Still, Morgan Stanley senior investment strategist Byron Wien reckons that most companies have enough cash that they aren't taking on too much risk by buying back shares.
But he finds the fact that companies aren't using their cash for things like new plants a worrisome comment on the both the business environment and the stature of the U.S. economy.
"What bothers me about share buybacks is that it suggests that companies have nothing to do with their money," he said. "I'm discouraged by what it says about America."