Taking Stock of Themselves

A wave of buybacks bodes well for the market

Stock buybacks are back. In April alone, tech companies announced programs worth $7 billion, up from $1 billion a year ago. In recent weeks, Oracle Corp. (ORCL ) unveiled a $3 billion program and Yahoo! Inc. (YHOO ) one for $500 million--its first ever. The binge isn't confined to tech companies, either: In May, publishers Readers' Digest Association Inc. (RDA ) and Knight Ridder Inc. (KRI ) both announced programs. And in the first quarter, nontech companies increased the amounts of shares they repurchased for the first time in a year.

What's going on? Companies have different motives for buying back their own shares. When employees exercise options, for example, earnings per share can quickly become diluted as the number of a company's shares outstanding grows. That worry prompted Yahoo's move. Sometimes a buyback is a sign that a company is very bullish about its own prospects. And with Nasdaq stocks down, on average, over 40% since last summer, companies can buy a lot more shares for fewer dollars, potentially giving a bigger boost to earnings per share. "I think management truly feels their stocks are undervalued. We haven't seen that conviction in the marketplace in a couple of years," says Goldman, Sachs & Co. Managing Director Peter Seibold.

That's certainly so at Readers' Digest. After peaking at $41 in August, its shares now trade at around $27, though operating profits rose 54% last year and 67% in 1999. On May 2, the board authorized the purchase of $250 million worth of shares. "At $27, we think the company is still undervalued," says William Adler, a company spokesperson.

There's no guarantee that a stock buyback program will increase share prices. Last May, for instance, when CNET Networks Inc. (CNET ) announced a $100 million buyback plan, its stock was trading at $40, down from $79 in December, 1999. Thus far, the company has spent $30 million purchasing shares, and its stock has since slumped to $12.

Some analysts consider the buyback trend alarming rather than encouraging. "It's a pretty powerful statement that during lean times companies are choosing to spend money to repurchase shares rather than to grow the business," says Jeffrey W. Joyce, senior associate at SCA Consulting in New York.

CASH RICH. At times, management can't think of much else to do with surplus cash. That seems to be the case with most savings and loans, especially North Central Bancshares Inc. (FFFD ), a small S&L in Fort Dodge, Iowa. It has announced 14 buyback programs since 1996, purchasing over 50% of its outstanding shares. "Most of the S&Ls have so much excess capital that their No. 1 decision is how much stock should they buy back," says Jeff Gendell, general partner of New York hedge fund Tontine Partners.

Few companies are that flush. But if the optimists are right, the growing willingness to splurge on buybacks could help the stock market a lot in coming months.

By Debra Sparks in New York

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