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.
End quote: the author Bernard Condon can be reached at http://twitter.com/BernardFCondon. His work can be found at: http://www.bigstory.ap.org/content/bernard-condon