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Stock Buybacks Surge as Companies Borrow for Share Repurchases
Old 09-20-2010, 03:20 PM   #1
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Stock Buybacks Surge as Companies Borrow for Share Repurchases

Following up on this thread JNJ exploits the "bond bubble" Bloomberg reports a substantial increase in buybacks.
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American companies announced $55.9 billion in repurchases since June, data compiled by Birinyi Associates Inc. show. That adds to $93.5 billion in the second quarter and $108.3 billion during the first three months of the year, compared with $125 billion in all of 2009. Corporations are using debt to pay for buybacks after the average yield on U.S. investment grade bonds fell to an all-time low of 3.70 percent last month, data from London-based Barclays Plc show.
Companies from Microsoft Corp. to PepsiCo Inc. and Hewlett- Packard Co. are taking advantage of low-cost financing, purchasing their stock to boost per-share earnings at a time when the Standard & Poor’s 500 Index trades at a 26 percent discount to its average valuation since 1954. At the same time, choosing buybacks may show executives are too concerned about the economy to invest in new projects or make acquisitions.
“It’s so cheap to do it now in the bond market: issue debt, fix their cost of capital, then shrink the number of shares outstanding,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion. “The markets are almost calling for them to do it.”
Stock Buybacks Surge as Companies Borrow for Share Repurchases - Bloomberg
The economy is tough but blue chip companies may find this to be the perfect moment for them to shine.
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Old 09-20-2010, 03:55 PM   #2
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The problem with these announcements is that they're generally made with the best of publicity intentions and the worst of timing. IIRC studies have shown that most companies do better handing out dividends instead of buying back their stock.

I'm a little cynical about the actual net effect on the float. I bet most of the buybacks go right back out the door as employee options & restricted stock. Not that there's anything wrong with that, but I've never seen a buyback announcement disclose the real truth: "We're giving our shares away so fast that we need to create some artificial demand!"
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Old 09-20-2010, 04:05 PM   #3
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This usually really bugs me. Companies are so bad at timing buying of their own stock - they seem to usually do it when the stock prices are high, spending cash that could otherwise be distributed as dividends. There were tons of buybacks in 2007 - then poof!

It's usually motivated by issuance of stock options - favoring insiders at the expense of shareholders.

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Old 09-20-2010, 04:08 PM   #4
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The problem with these announcements is that they're generally made with the best of publicity intentions and the worst of timing. IIRC studies have shown that most companies do better handing out dividends instead of buying back their stock.
Perhaps, but I think as long as dividends are doubly taxed it tends to make share buybacks the preferred way to deploy cash flow in excess of needs.

The funny thing is, I wonder how many of these companies that are flush with cash like this have given no raises in three years because "times are tough"...
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Old 09-20-2010, 04:15 PM   #5
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It's usually motivated by issuance of stock options - favoring insiders at the expense of shareholders.

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This is a real problem if it does not reduce the number of outstanding shares
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Old 09-20-2010, 04:21 PM   #6
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The problem with these announcements is that they're generally made with the best of publicity intentions and the worst of timing. IIRC studies have shown that most companies do better handing out dividends instead of buying back their stock.
Execs make their money on share price, not shareholder return, so dividends don't count. Personally, I'd rather have the dividend.

I was wondering over the weekend - would gov't revenue increase if corporate taxes were abolished? Assuming the difference flowed through to stockholders as increased dividend or higher stock price (capital gain), would the higher individual taxes @15% offset the loss in corporate - which, IIRC, is net lower than 15%.
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Old 09-20-2010, 06:06 PM   #7
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I'm a little cynical about the actual net effect on the float. I bet most of the buybacks go right back out the door as employee options & restricted stock. Not that there's anything wrong with that, but I've never seen a buyback announcement disclose the real truth: "We're giving our shares away so fast that we need to create some artificial demand!"
Why would they want to create artificial demand when issuing options/restricted stock?
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Old 09-20-2010, 06:07 PM   #8
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It's usually motivated by issuance of stock options - favoring insiders at the expense of shareholders.

Audrey
Could you clarify what you mean by this -- I'm not following.
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Old 09-20-2010, 06:34 PM   #9
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Could you clarify what you mean by this -- I'm not following.
When a company grants stock options, it is creating stock out of "thin air" - increasing the number of shares outstanding. This dilutes the existing shareholders - they lose a percentage of the company they own. In other words - their ownership percentage shrinks.

So often, to make this less of an explicit transfer of company ownership from shareholders to insiders, the company buys back shares to match the grants. But IMO - that is usually money down the drain as company stocks are usually bought at such high prices, and that same money could have been returned to shareholders as a dividend.

I don't have a problem with this IF the officers are also majority or very high % shareholders of the company, as they are diluting themselves as well, and hopefully making a judicious tradeoff in rewarding employees. But usually corporate officers are just hired professional managers and they don't hold enough of the company to really care, they aren't really in there for the long term, and they are interested in wealth through salary, bonuses, and stock option grants. This has been a problem with US corporate culture for several decades now, and I don't know how we will get past it as there are too few active shareholders these days to curb these excesses.

In general, the idea would be that the stock option grants are kept small and well within the traditional annual growth rate of the company, so that hopefully everyone benefits - the insiders and the shareholders. But in the 90s started some really rah-rah option granting and it continued as a strong habit in the 2000s even though all of a sudden these "growth" companies stopped growing.

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Old 09-20-2010, 06:56 PM   #10
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In case anyone wonders where I'm coming from - since I was able to RE via stock options....

My company was completely employee owned, and the founders who were the board and officers at the time, granted some of the early employees options as part of our packages in this startup. We were not funded by venture capitalists or any outside investors, but pretty much self-funded - which is almost unheard of for a high-tech company. Us newbie startup employees were lucky to be granted options and thus to share in the growth of the company, but we also played significant roles in the early growth of the company. And really, until the company went public, it was all "funny money" anyhow. You had to have faith and commitment.

When the company went finally public 15 years later, it was still >75% owned by insiders for a long time afterward. Option grants were much smaller, and kept within strict growth guidelines. The founders probably delayed going public almost a decade, because they had concerns about losing control of the company to public shareholders. I think finally the company got big enough that it was too constraining on operations not to be public. The timing was brilliant though - mid 90s.

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Old 09-20-2010, 07:22 PM   #11
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Execs make their money on share price, not shareholder return, so dividends don't count. Personally, I'd rather have the dividend.
Kinda diverging incentives, no? I guess the only answer here is to make exec compensation a function of the dividend rate (and other factors like ROE).

Buffett could get an entire book (and several research papers) from publicizing the details of how he sets compensation for his Berkshire business owners. But then he's starting with the right sort of people to begin with, and they don't need much external incentive.

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I was wondering over the weekend - would gov't revenue increase if corporate taxes were abolished? Assuming the difference flowed through to stockholders as increased dividend or higher stock price (capital gain), would the higher individual taxes @15% offset the loss in corporate - which, IIRC, is net lower than 15%.
That's a very interesting thought. It'd certainly repatriate a lot of overseas multinational profits.

If I was the IRS I'd rather ride herd on the S&P500 than have to keep up with the great American taxpayer x 1,000,000. But then the S&P500 are so much better at tax evasion avoidance that the Treasury might still win out by letting it flow downhill to John Q. Public.

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Why would they want to create artificial demand when issuing options/restricted stock?
I'm being a bit sarcastic, but some companies issue so much stock and raise the float so much that their share price drops. A buyback program has the psychological public-relations effect of causing people (other than employees) to want to buy the stock, creating a demand for it and raising its price. It has nothing to do with the company's financials or its sector's fundamentals-- strictly a board resolution and a press release, bingo! Price bounce. It gives the option-holding employee that much more profit above his option's strike price.
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Old 09-20-2010, 09:48 PM   #12
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The funny thing is, I wonder how many of these companies that are flush with cash like this have given no raises in three years because "times are tough"...
Companies don't give raises because they are doing well - they give raises when they need to in order to retain the people they want to retain. And vice-versa.

Salaries are an expense like anything else. Can you imagine a business owner saying "we had a good year, let's pay more than the market rate for the gasoline to run our fleet"?.

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Old 09-21-2010, 07:09 AM   #13
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From what I have seen, tech companies tend to be the worst offenders on the option printing front, but they are by no means the only miscreants. But I think there are a lot of companies actually paying up to buy back stock.

Many big companies have not much debt, gobs of cash, and its not clear where growth will come from so they are reluctant to make growth investments. At the same time, debt vosts are very low and equities are broadly on sale. This gives big incentives for buying back stock and to engage in mergers. As an example, look at Lowe's. They have very modest net debt (1X EBITDA or so) and their business generates a lot of cash since they are basically not opening any new stores right now. They upped the dividend a bit, but they clearly do not wish to raise the div too much because it would constrain their ability to grow once things pick up again. So they have been buying back their stock at a rate of about $500MM a quarter. I'd guess that will continue until business picks up and it is attractive to start opening stores again. I do not think they are granting a lot of options to employees outside of senior management. I bet we would see the same story all over the place in the S&P500 if we looked closely.
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Old 09-21-2010, 08:27 AM   #14
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Companies don't give raises because they are doing well - they give raises when they need to in order to retain the people they want to retain. And vice-versa.
Uh, yeah, I just slightly kinda know that, y'know? It just seems like a cop-out to say "times are bad" to justify no raises when your own company is doing well. That was the point -- the excuse that makes it sound like the company is struggling when they are flush with cash.

I will give our CEO some credit for at least being honest about it this time around: "We didn't give anything out because we don't have to in order to stay competitive in this market."
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Old 09-21-2010, 09:57 AM   #15
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Uh, yeah, I just slightly kinda know that, y'know? It just seems like a cop-out to say "times are bad" to justify no raises when your own company is doing well.
Well, since I'm not working I don't know if CEOs are using that as an 'excuse/justification' or not, or if it is just something people are throwing out there in frustration. Regardless, (as you know ), justification, excuse, or not - they just don't need to be handing out many raises in this environment.

I'd prefer honesty, but some people actually prefer to have the boss give some 'excuse' for no raise. They'd rather hear "it's out of my hands, corporate didn't give us any budget for raises, said it was a bad year"), than to hear "we can hire people like you for less, be glad we didn't cut your pay!".

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Old 09-21-2010, 10:04 AM   #16
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They'd rather hear "it's out of my hands, corporate didn't give us any budget for raises, said it was a bad year"), than to hear "we can hire people like you for less, be glad we didn't cut your pay!".

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I wouldn't mind hearing that if they hadn't given themselves big raises and stock options out the wazoo...

And another thing that isn't said is "we can pay some third-world peasant $100/mo".

Makes one feel like a member of the "team"...

Race to the bottom?
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Old 09-21-2010, 10:06 AM   #17
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I wouldn't mind hearing that if they hadn't given themselves big raises and stock options out the wazoo...

And another thing that isn't said is "we can pay some third-world peasant $100/mo".

Makes one feel like a member of the "team"...

Race to the bottom?
Yep, especially when at least some of the "record profits" are the result of moving most of your R&D to India and extinguishing hundreds of good American jobs. Really makes you feel rah-rah about the company's prosperity...
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Old 09-21-2010, 10:22 AM   #18
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I wouldn't mind hearing that if they hadn't given themselves big raises and stock options out the wazoo...

And another thing that isn't said is "we can pay some third-world peasant $100/mo".

Makes one feel like a member of the "team"...

Race to the bottom?
Well, theoretically, they 'need' to pay those raises/bonuses to keep that talent. But I'm as skeptical as the next guy about that, we've discussed it many times that there seems to be a network at that level, and it really is not a free market. I wish we could get it fixed, but I don't see it happening.

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Yep, especially when at least some of the "record profits" are the result of moving most of your R&D to India and extinguishing hundreds of good American jobs. Really makes you feel rah-rah about the company's prosperity...
Well, but if the "record profits" are really the result of moving most of your R&D to India (as you are phrasing it here), then the prosperity might not be there without that action, and there might not even be a company to be rah-rah about.

I just don't think 'rah-rah' feelings are what are going to keep jobs here. We need to be competitive. I don't see any way around that, as much as we may not like what it does to our standard of living (is it a coincidence that SOL can stand for Standard of Living, and something else?). I'm certain that the people on the other side of this issue are happy to be raising their SOL to a fraction of what we have.


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Old 09-21-2010, 10:42 AM   #19
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Well, but if the "record profits" are really the result of moving most of your R&D to India (as you are phrasing it here), then the prosperity might not be there without that action, and there might not even be a company to be rah-rah about.
Pretty easy to say when you no longer have to work or dealing with the issues facing the declining middle class worker. Let them eat cake!

The problem isn't with any individual company. It's with public policy and tax laws that allow companies to do this, and in some cases even makes it advantageous from a tax standpoint to do so, which pretty much *forces*companies to do it to stay competitive -- since if a competitor is going cheap and laying off a bunch of Americans to move their IT to India, another business has to do the same. Having said that, don't expect me to get too excited about record profits that benefit major shareholders and executive bonuses. As long as Big Business is able to successfully instill an "at least I still have a job" mentality in the American work force -- and as long as our policy allows it if not *encourages* it -- the middle class will continue to lose ground.

There should *never* be tax benefits for exporting jobs. Ever.
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Old 09-21-2010, 12:25 PM   #20
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Pretty easy to say when you no longer have to work or dealing with the issues facing the declining middle class worker. Let them eat cake!
Aww, c'mon. I would hope you would realize that is not my attitude. But it doesn't change the reality of the situation, no matter how much we wish it did. And relatively, American workers are "eating cake", while many of those fighting for our jobs barely have enough bread or rice to get by.


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There should *never* be tax benefits for exporting jobs. Ever.
I certainly agree with that. Sounds like the angst needs to be directed at Congress. If they are encouraging this with tax codes, then it seems they are the ones saying "let them eat cake!".

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