USA TODAY US Edition
Critics say companies waste cash on buybacks
Firms spent $299 billion last year buying shares
Companies seem to have a hole burning in their pockets when it comes to buying their own stock.
Powered by their record $940 billion pile of cash on hand, companies boosted buying their own stock a record 81% to $86 billion in the fourth quarter and a record 117% to $299 billion for all of 2010, Standard & Poor’s said Wednesday.
“It’s the biggest bounce back in buybacks we’ve seen,” says Howard Silverblatt of S&P.
Investors for years have applauded buybacks because companies claim they reduce the supply of shares and, in theory, make each share more valuable. Now there’s a growing skepticism because:
-Companies’ poor track record with buybacks. After the stock market bottomed in March 2009 and stocks were cheap, companies slashed buybacks to just $24.2 billion in the second quarter of 2009, their lowest level since at least 2006. That’s after buybacks hit a record $172 billion when stocks were peaking in the third quarter of 2007. “As an investor, you want to see a better use of deploying cash,” says Jack Ablin of Harris Private Bank.
-Increased interest in dividends. Investors are hungry for yield, and companies’ buybacks eat cash that could be used for dividends, says Michael Gumport of MG Holdings/SIP. Buybacks are burning 60% of the cash companies have to dispense back to investors, while dividends account for just 40%, he says. That’s a complete reversal from the second quarter of 2009.
-Q-estionable motives. By performing buybacks, corporate executives make their stock options more valuable without bringing any improvement to the business, says Paul Griffin, professor of management at the University of California-Davis.
Not all investors are as critical. The fact companies are optimistic enough to buy back stock is a positive, says Vincent Deluard of TrimTabs. Buybacks are not at extreme levels yet, either. Companies’ buyback payouts last year are half of where they were at the peak in 2007, S&P says. Still, if investors applaud buybacks, that could change fast. “If investors jump on the bandwagon . . . we could be in store for Buyback Bonanza 2,” Silverblatt says.