Critics say companies waste cash on buybacks

Firms spent $299 billion last year buying shares

- By Matt Krantz USA TODAY

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.

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