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Mike Larson, Money and Markets columnist and editor of the Safe Money Report, is out today. Mark Najarian, the managing editor of Money and Markets, is filling in. Mike’s regular column will return Tuesday after the Labor Day holiday …
CEOs were spending like crazy early this year. Not on private planes, new cars, new homes (OK, maybe on them, too), but more publicly on the buying back of their own companies’ shares.
According to a report by Factset’s BuyBack Quarterly publication, share repurchases of S&P 500 companies hit $155 billion in the first quarter, the third largest quarterly amount since 2005. For the previous 52 weeks, the value of buybacks was $535 billion.
Some examples: 21st Century Fox (FOX, Weiss Ratings: A-) said it would buy back $6 billion of its shares in the next 12 months; Intel (INTC, Weiss Ratings: A) said it expects to repurchase $4 billion in the current quarter; and Caterpillar (CAT, Weiss Ratings: B) is in the midst of a $10 billion repurchase plan; to name just a few. That comes on top of a massive buyback by Apple (AAPL, Weiss Ratings: A+ ) announced earlier.
There are signs the practice could slow in the second half, especially with share values at high levels. That makes it a good time to examine whether share buybacks are really the best use of corporate cash and if they’re in the best interest of shareholders.
|Caterpillar is among the companies conducting share buybacks.|
Companies have several options to make use of their cash hoards, including: 1) investment in growth (organically and through M&A); 2) increase regular dividends; 3) pay out a special dividend; 4) buy back their own debt; or 5) buy back their own shares – something that became more popular in this year’s low-yield environment.
As a shareholder, a special dividend probably sounds the best. An unexpected windfall can always come in useful, but of course there are downsides, including a tax liability. Increasing a regular dividend also looks good and usually helps boost the share price on the day of the announcement. But increasing a regular dividend, if can’t be sustained, often does more damage to a share price when it has to be lowered in the future.
For impatient investors, capital expenditures targeting future growth may not sound exciting. Investments in organic growth or through acquisition of another company can sometimes hit the company’s share price in the short term. But in the long run, investing in the future at a time when money is cheap can build a company’s market share and provide the best returns for long-term investors.
A share buyback can be a more subtle move and one that doesn’t immediately become apparent to the average shareholder.
Here are some of the advantages of a share buyback. Obviously, it reduces the number of outstanding shares, which will help increase the company’s earnings-per-share figures. They don’t present an immediate tax liability, as opposed to dividends (although, hopefully, they will increase the share price and the taxes will be paid on that appreciation when the shares are sold).
“A share buyback can be a more subtle move and one that doesn’t immediately become apparent to the average shareholder.”
On the other hand, when a company has that much extra cash, it’s usually done at a time the company is thriving and, consequently, its shares are likely to be at a high level, meaning the cash used to buy back shares will get fewer shares than if it were utilized during a down time for the shares.
In doing research, I came across a site called dividend.com. I guess it’s clear where they would stand on the matter. It suggests that buying back shares “artificially” increases the EPS and can temporarily keep a company’s share price high, “not because the market believes the stock is of high quality, but simply because the company is throwing its own money at its own stock.” It argued that paying dividends shows that the company is confident in future cash flows. And it says that most companies have firm dividend policies, meaning they likely have calculated the correct levels and won’t need to cut back unless there’s a major disruption to their business. In conclusion, dividend.com says, “Let the shareholders buy back shares – if they choose” meaning that dividends would allow them to purchase shares on the open market if they want.
Other experts say that stock buybacks can benefit shareholders if there is no other way to utilize the cash – no relevant M&A activities, for instance, and if the shares are undervalued. Companies spending the most on share buybacks are outperforming the S&P 500, according to data compiled by Bloomberg. “The 100 firms with biggest buybacks relative to market value have gained 5.5 percent this year, compared with a 4.9 percent increase in the benchmark index,” Bloomberg points out.
Aside from the merits of stock buybacks themselves, one area of concern is that, at some point, they could end, especially if interest rates start to rise. Low rates have helped fuel the buying, but should rates rise, and buybacks end, it could have a negative effect on share prices.
My view? In my heart (and my wallet), I’d rather have the quick return of a raised or special dividend. In my mind, I know that capital expenditures for future growth are probably better, but I fall into the impatient investor category.
What do you think? Do you prefer the immediate payoff of a special dividend, even with the tax liability? Or the comfort of a raised regular dividend? Would you prefer that your company invest in the future, by expanding organically or maybe through acquisitions? Or do you favor the stock buyback for what it can do to EPS and future financials? I’d be interested to get your view on the matter – click here to participate in the discussion.
|OUR READERS SPEAK|
Developments in Ukraine continue to attract the attention and concerns of readers of Money and Markets columns. The variety of comments makes fascinating reading, with a big split – many readers say the U.S. is overplaying the threat from Russia, saying ethnic Russians there deserve the right to self-determination. Others, however, urge a stronger effort to defend Ukraine’s territorial integrity, including the step of inviting it to join NATO.
Reader Lee blames U.S. policy for the crisis: “The Ukraine crisis started due to an illegal overthrow of the legally elected government by elements supported by and encouraged by US intelligence agencies for economic benefits.” Lee adds that, even if that elected president was a bad one, the proper way to remove him would have been for the Ukrainians to do it through another election, not through coup. And, Lee says, “This is Europe’s problem, not ours.”
Meanwhile, Reader Frank is clearlynot a supporter of Russian President Vladimir Putin. “All this time, Putin has been playing a cat and mouse game with the U.S. and Europe, while lying through his teeth all along. Anyone who thinks they can deal with this lying dictator is either stupid or crazy.
Reader Richard K seesa bad result for both Russia and Ukraine. “In the end, no one wins.” Russia might succeed militarily for now, he says, “but the decades of building alliances and partnerships with western Europe and the former Warsaw Pact countries now lie in ruin. Putin’s biggest trump card, oil and gas exports to Europe, are safe for now but most European countries will be fast tracking any plan that will reduce or eliminate Russian energy as soon as possible.
“Ukraine will have to come to terms to losing the lands east of the Dnieper River and with it a significant part of their industrial base. A poor country will get even poorer as Ukraine pours what little money it has into its military. Ukraine anger at Moscow will be costly and lasting long after Putin rides off into the sunset.”
If you want to comment on Ukraine-Russia or any other developments, we at Money and Markets are interested in your views. Click here to add your views.
|OTHER DEVELOPMENTS OF THE DAY|
OK, Sept. 9 is the day! With talk of a new iPhone and its first wearable device, Apple Inc. (AAPL, Weiss Ratings:A+ ) has issued invitations to its product introduction early next month in Cupertino, Calif. It’s not saying too much: “Wish we could say more,” it’s saying in its invite. But just about everyone else is saying more, with speculation surrounding the launch of the iPhone 6 and an iWatch. Reports say Apple will unveil two new versions of the iPhone – one with a screen of 4.7 inches and the other with a 5.5-inch screen. Shares in the company have been rising in anticipation.
But, in the end, the consumer will decide the success of any new products. That’s why your view is important. Do you plan to rush out and buy a new iPhone or an iWatch? I just bought an iPhone 5 – should I have waited? What’s your usual strategy: Do you usually buy a new product on the release date, or do you wait for any bugs to be fixed? What about as an investor? Will a launch like this help you decide to buy or sell shares? Have you bought since the 7-for-1 split earlier this year? Click here to add your comments.
U.S. consumer spending declined 0.1 percent in July, hurt mainly by a drop in auto purchases. That follows a 0.4 percent rise in June and was the first decline since January. Auto sales were down in July, but that comes after several months of gains.
Is this is a blip on the road to recovery or is the consumer starting to cut back? Studies are showing that consumers are only buying when they see a bargain, no longer willing to pay full price for anything. Is that you? Click here to comment.
And one last thought and question for you. JPMorgan Chase & Co., (JPM, Weiss Ratings:B+ ) said it is planning to step up spending on cyber security after reports that Russian hackers had broken into the company’s network and stolen sensitive information. The bank is warning customers that should they detect any suspicious activity in their accounts, they should contact the bank.
Will stories like this cause you to cut back on on-line banking? Have you been affected by this hacking or been contacted by the bank? Click here to add your comments.
(Mike Larson’s afternoon column will return Tuesday afternoon after the Labor Day Holiday.)