The Great Buyback Boom Of '93Jeffrey M. Laderman
Back in the 1980s, it was a defensive move. Many companies bought back big chunks of their stock--often with borrowed money--as a way to keep the shares away from unfriendly takeover types. But the demise of the dealmeisters in the early 1990s made buybacks less urgent. The recession forced Corporate America to focus on shrinking debt, not equity.
But now, an increasing number of top-drawer companies are back in the buyback game with nary a raider in sight. This time, the reasons are mainly offensive, such as boosting stock prices and earnings per share. And the new tax bill should help fuel the buyback boom.
So far this year, there have been 359 announcements of stock buybacks worth about $23.5 billion, according to Securities Data Co. That compares with 599 announcements of $35.6 billion in 1992 and only 437 worth $20.2 billion for all of 1991. Among the companies whose boards have authorized repurchases recently are H.J. Heinz, Nike, PepsiCo, Quaker Oats, Reebok International, and Wachovia.
The main reason for the buybacks is that many corporations are awash with excess cash. The collapse of interest rates has allowed them to save billions in interest expense, and the dramatic wave of layoffs has cut overhead. At the same time, the economic recovery has been so tepid that companies are wary of expansion or acquisitions--and a period of robust economic growth is just not in the cards anytime soon.
"Free cash flow is going to blossom in the next several years," says investor Kenneth S. Hackel, whose Systematic Financial Management Inc. invests in companies based on their cash flows. "Many companies will start buybacks or enhance ongoing programs. What else can they do with the money?"
Quaker Oats Co. is a case in point. Like many consumer-products companies, it has been throwing off a lot of cash and has little choice but to repurchase its shares. "We spend on new products, we make acquisitions, and we raise the dividend, and we still can't soak up all the cash," says Janet K. Cooper, Quaker's treasurer. The company has repurchased 20 million shares in the last five years and recently authorized acquisition of an additional 5 million.
Many executives say while the buyback program is a good use of their cash, it's not the first choice. "We'd rather use our capital to make loans," says Robert S. McCoy Jr., chief financial officer for Wachovia Corp., a bank with $33.2 billion in assets that recently boosted its buyback program from 3 million to 5 million shares. "But we're in a period of slow loan growth."
Boosting per-share earnings--and thus stock price--is another goal of corporate buyback strategies. If a company earns the same amount of money with 10% fewer shares outstanding, its earnings per share go up 11%, and so does return on equity. And higher ROEs often translate into higher stock prices.
That logic has been catching on even in Silicon Valley, where the conventional wisdom has long held that companies needed to husband cash to build the next generation of wizardry. Yet high-tech luminaries such as Cypress Semiconductor Corp. and Sun Microsystems Inc. have initiated major buyback programs. "It reflects management's belief in the strong position of the company," says Richard B. Barker, Sun's treasurer, "and that position is not necessarily reflected in the price of the stock." Sun is trading at 273 8, down about a third from its all-time high.
TAX DODGE. Some analysts think the big drug companies--whose shares are down nearly 40% from their highs--will have to step up buybacks. "They're facing slower revenue growth and higher taxes," says drug analyst Neil Sweig of Ladenburg, Thalmann & Co. "They're going to need buybacks to show any growth in earnings per share."
The new tax bill is likely to quicken the pace of buybacks. Traditionally, many companies tended to pay out excess cash as dividends. But the tax bill raises the top rate on individuals' ordinary income--the rate at which dividends are taxed--to 39.6%, while leaving the maximum capital-gains tax at 28%.
Buybacks make sense even without the tax hike. The only shareholders who pay tax are those who sell at a profit. Shareholders who choose to hold on to their shares, academic studies show, eventually reap the benefit of a higher stock price down the line.
LONG LAG. Companies have also found a buyback can be more effective than, say, special dividends. "Special dividends are one-time events," says a spokesman for Lubrizol Corp., which has bought millions of shares since 1987 and recently authorized a 4 million share repurchase, about 6% of shares outstanding. "A buyback has a more long-lasting effect."
That raises a key question about the efficacy of buyback programs designed to boost stock prices: Do they really work? By 1980s standards, the '90s buyback programs have been modest--and so has the market's reaction. "Sometimes the stock moves up a half a point, but then it goes back down," says market analyst Laszlo Birinyi of Birinyi Associates. In part, that's because it can take months or years before a buyback plan is executed--and a company has no obligation to do so. And not all the shares repurchased are retired. Microsoft Corp., for instance, is buying shares--about 3 million so far--mostly for employee stock purchases and stock-option plans. And some buy shares for dividend-reinvestment programs.
Still, even if a company executes only a portion of its repurchase plan, what's important is that it stands ready to buy more stock. "It tells you the company cares about its shareholders," says Birinyi. That's the kind of company to invest in.
BIG-NAME BUYBACKS BRISTOL-MYERS SQUIBB With stock hitting new lows, will be under pressure to step up buybacks. Can buy another 25 million shares. PEPSICO Authorized buyback of up to 50 million shares, or $1.9 billion at current prices. QUAKER OATS Retired 4.8 million shares over past year at a cost of $323 million and has the approval to buy an additional 5 million. SUN MICROSYSTEMS Aggressive buyback program cut shares outstanding by 9% over last year. More repurchases have been O.K.'d. WACHOVIA Large regional bank may use capital to buy back up to 5 million shares. DATA: COMPANY REPORTS, BUSINESS WEEK