A refreshing item authored (Associated Press) By
Bernard Condon, AP Business Writer – header “ Companies lose billions buying
back their own stock Big companies have lost billions buying their own shares”
Here a few clips – keep in mind that I am picking the
context that supports my view that share buy-backs are just accounting smoke
and mirrors.
Quote: “(over the past three years) Many corporations
would have been better off investing that cash in an index fund instead of
their own stock. The overall market rose 39 percent over the same period. The
companies could also have distributed that cash to shareholders, allowing them
to spend what is, in the end, their money.
And it's not just a few big corporate losers
accounting for all the pain. The group includes 229 companies in the Standard
and Poor's 500 index, nearly half of the companies in the study prepared by
FactSet for The Associated Press.
When a company shells out money to buy its own
shares, Wall Street usually cheers. The move makes the company's profit per
share look better, and many think buybacks have played a key role pushing
stocks higher in the seven-year bull market.
But buybacks can also sap companies of cash that they
could be using to grow for the future, no matter if the price of those shares
rises or falls.
"Whenever you see a buyback, the company always
says, 'We think our stock is cheap,'" says Nicholas Colas, chief market
strategist at brokerage ConvergEx Group.
They are sometimes so confident that they take out
enormous loans just to buy more and more shares. That those shares have now
plunged in value is something Colas calls a "great irony" of the bull
market.
Among the companies with the biggest paper losses are
struggling ones that bought after their stock fell, only to watch prices drop
even more. Macy's, the beleaguered retailer, is down $1.5 billion on its
purchases, a 26 percent loss. American Express has lost $4.1 billion, or 34
percent. As the price of oil plunged, driller Chevron racked up $2.8 billion in
paper losses, or 28 percent.
"The company doing the most buybacks is often
not investing enough in its business," says Fortuna Advisor CEO Gregory
Milano, a consultant who has written several studies criticizing the purchases.
He says most buybacks are "financial engineering" and a waste of
money.
The study looked at 476 companies in the S&P 500
index, leaving out the index members that split off parts of their businesses
during the period. Among the findings:
Nearly a third of the companies studied, 153 in all,
lost $100 million or more on their purchases in three years.
MasterCard has the biggest paper gains from buybacks:
$7.9 billion. IBM has the biggest paper losses: $9.8 billion. IBM says it isn't
neglecting long-term investments and notes that the money it spent on R&D,
big projects and acquisitions last year was triple what it spent buying its
stock.
Companies often buy at the wrong time, experts say,
because it's only after several years into an economic recovery that they have
enough cash to feel comfortable spending big on buybacks. That is also when
companies have made all the obvious moves to improve their business — slashing
costs, using technology to become more efficient, expanding abroad — and are
not sure what to do next to keep their stocks rising.
"For the average company, it gets harder to
increase earnings per share," says Fortuna's Milano. "It leads them
to do buybacks precisely when they should not being doing it.
And, sure enough, buybacks approached record levels
recently even as earnings for the S&P 500 dropped and stocks got more
expensive. Companies spent $559 billion on their own shares in the 12 months
through September, according to the latest report from S&P Dow Jones
Indices, just below the peak in 2007 — the year before stocks began their
deepest plunge since the Great Depression.
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