Buy Backs Vs. Dividends
Thursday, February 02, 2006SUSIE GHARIB: There`s a growing trend on Wall Street these days and Microsoft, General Electric and American Greetings are part of it. They have all recently announced big stock buyback programs and they are not alone. Experts predict 2006 will be a big year for stock repurchases. Suzanne Pratt looks at just what that means for investors.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The four-year economic expansion has made much of corporate America cash rich. Many companies opt to return the money to shareholders through dividends. Others use it for mergers and acquisitions or for capital expenditures. But in the last year, a growing number of companies, from Time Warner to General Electric, have been designating more of their excess cash to stock buybacks. Standard & Poor`s estimates that S&P 500 firms spent $315 billion to repurchase shares last year. That`s 60 percent more than in 2004. Experts say this year the number could be even higher.
HOWARD SILVERBLATT: The companies are being pushed by individuals and institutions to do something with the record amount of cash they have on hand to invest it somewhere.
PRATT: The logic of buybacks is fairly straightforward. If a company buys back shares in the open market, it helps support the share price. In addition, stock buybacks reduce the number of outstanding shares, which in turn helps boost earnings per share. It can also signal to the market that management believes the shares are undervalued. For those reasons buybacks are usually viewed as favorable for investors. Lehman Brothers says companies that aggressively repurchase their shares typically have better returns than the broader market.
CHIP DICKSON: We looked back over a fairly long period of time, since 1984. We found that 70 percent of the time, those kinds of companies have outperformed the market because they really are taking stock out of the market. But, I also think because they have the wherewithal to.
PRATT: In other words, big buyback plans are often the byproduct of a thriving business. But skeptics say buyback programs aren`t necessarily the best thing for shareholders. They argue buybacks artificially prop up earnings per share. Some even accuse companies of using aggressive buyback programs to manage earnings during weak periods. As a result, experts advise investors to focus on the net income number in earnings reports and not just earnings per share. That`s not always easy.
SILVERBLATT: Some may not spell it out at all. There`s not a requirement to explain the differences. It may be there in the numbers and the spreadsheets, but that`s not the same (ph) as there on the front page.
PRATT: In addition, it also pays to consider whether a company has been using buyback programs to offset the growing number of options they`re offering to their employees. Without the buybacks, many shareholders would see their positions significantly diluted by the options.
DICKSON: Often buybacks have been done really to just neutralize all the options that have been issued. But you`ve seen the level of options come down a lot as companies have had to expense them.
PRATT: Experts say companies often chose buybacks over dividends because dividends are viewed as a more permanent commitment. Once a company pays a dividend, shareholders expect it to continue. Not so for buybacks. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
