| David Pauly: Buybacks show CEOs no wiser after the recession | |
| Cos should use cash better | | David Pauly / November 1, 2009, 0:34 IST | |
Corporate executives have learned nothing from the recession. As the economy recovers, they should use the cash they piled up during the bad times to build new plants and make sensible acquisitions while costs are low and they can leverage their spending with low-interest debt.
Instead companies are investing in a woeful strategy of the past — buying back their own stock.
International Business Machines Corp., this week said it would use some of its $11.5 billion in cash to help repurchase $5 billion of its own shares, on top of an already existing $4.2 billion buyback plan.
IBM, the largest provider of computer services, has been a serial buyer of its stock, spending about $70 billion in the process in the past six years.
Travelers Cos., a property insurer, earlier this month announced a $6 billion buyback after its profit for the third quarter more than quadrupled from the same period a year earlier. The company had scaled back its repurchases last year to preserve capital.
Chubb Corp., another insurance company; Visa Inc., the largest processor of credit- and debit-card payments; and TD Ameritrade Holding Corp., a retail brokerage, have also recently disclosed buybacks accomplished or to come.
Buybacks have been gospel on Wall Street for years. By reducing the number of shares outstanding, companies increase earnings per share and, they hope, their stock prices.
POOR TIMING
Unfortunately, companies tend to buy when their earnings and cash flow are rising, which is usually when their stocks are going up. They buy high, instead of buying low when profits and shares are down.
Exxon Mobil Corp., the world's biggest company by stock market value, on October 29 cut its planned buybacks for the fourth quarter to $2 billion from $4 billion in the third quarter.
That followed four straight quarters in which the oil giant's profit declined from the year-earlier periods. Exxon Mobil has long been committed to buybacks, and is sure to increase that spending when its earnings, and shares, rise.
Buybacks indict chief executive officers for lack of imagination. They must have something better to do with the money than following securities analysts in knee-jerk fashion. Right now is a perfect time to start a new line of business.
WHAT IF?
TD Ameritrade has a paper profit on the roughly $450 million it spent in the September quarter on buybacks. The broker said it paid an average of $11.94 a share and the stock closed on October 29 at $19.55. Still, plowing this money back into its business might have produced better long-term returns.
CEOs could also spend the buyback money on reducing debt incurred when interest rates were higher. Or how about rewarding shareholders with dividend increases or special payouts?
Visa did raise its quarterly dividend to 12.5 cents a share from 10.5 cents and Travelers increased its quarterly payment 10 per cent to 33 cents a share. This is peanuts. Travelers is giving its stockholders about $67 million more than before at an annual rate, about 1 per cent of what it is committing to buybacks.
CEOs always say buybacks return money to shareholders as if that were meritorious. What they are doing is paying off shareholders who want to sell their stock — and who may be taking losses on their investment rather than earning a return — and all but ignoring those keeping the faith.
No matter. Buybacks continue. Nestle SA of Switzerland, the world's largest food company, this month increased its planned 2009 buybacks to 7 billion Swiss francs ($6.86 billion) from 4 billion francs.
Buyback proponents already are salivating at what Nestle may do next year. The company has an option to sell its stock in Alcon Inc., an eye-care company, to Novartis AG, the Swiss drugmaker, for what might approach $30 billion.
Rather than buybacks, faithful Nestle shareholders would be better off if big dividends dropped into their pockets.
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