Boats & Stocks

[Francois+Goelo]

>>> Shares Buy-Back, the reality...

“Were Post 9/11 Share Buy-back programs an Buy Indicator?
A Recap”


When Growth Report launched in August 2001, we could never have expected the events of September and the crippling effect they had on the global stock markets. In light of the dramatic short-term damage on the U.S. markets, many companies announced plans to re-purchase shares as a result of what they considered to be an opportunity to highlight that the long-term prospects of the respective companies and the implied over-sold nature of their company’s stock. The SEC announced ‘emergency’ measures that allowed companies to enact share re-purchase plans that removed many of the restrictions placed on companies buy-back their own shares. These circumstances opened the floodgates to numerous companies that subsequently either initiated buy-backs under pre-existing authorizations or through new re-purchase filings. See Growth Report Vol. 1 Issue 4

At the time, we have to admit that we held a fair degree of cynicism that such announcements were tantamount to the cheapest promotion of a company’s stock that any company could enact. Furthermore, Growth Report considered the use of shareholders funds to re-purchase stock to be the sign of a company which in certain cases highlights the lack of anything better to do with shareholder funds. After all, as an investor, would any of us be happy with a company which considers the best use of its treasury to buy its own stock over investing in the business that we as investors are investing in?

The bull-market was fed by the constant need to demonstrate earnings ratios and growth rates that are better than the competition. By initiating stock buy-backs, companies are able to maintain earnings growth by reducing the number of shares in the company, but at what cost to the business itself? There are, of course, exceptions to this rule – one only needs to look at the likes of long-term buy-back programs such as General Electric [GE:NYSE] to realize that the benefits in the long-run make a great deal of sense when the capital from such a monstrous company cannot constantly be thrown back into corporate growth through any conventional means.

With the recent round up of fourth quarter financial results, Growth Report has revisited many of the companies which we first highlighted as initiating these programs as well as a number of other examples which grabbed the headlines in the early days when the markets reopened on September 17th. Although, we can draw no accurate conclusions to our thought process at the time, there remain lessons that can be learnt for anyone who believes that large share re-purchase announcements carry an opportunity to jump on the lead given by the company in question.

Most of the companies we mentioned at the time have had, on balance, a relatively stable five months and the bulk of the repurchases have been made at levels at or below current market levels. This could be considered as a shrewd move on behalf of management. However, the same management in many cases also made repurchases of stock at much higher levels during the bull-market and as such our opinion is mixed as to the overall benefits of such plans. For solid companies with excess capital that have been through traumatic times more than once in their history, the moves are earnings enhancing in the longer-term. Growth Report’s concerns at the time were less about these longer-term benefits and more to do with a previously mentioned cynicism toward the timing of the announcements and the actual reality of whether purchases would be made or not.

A study of recent fourth quarter financials offers a mixed approach of the companies that announced re-purchase programs – a lesson that may be of use in the future. Given that the bulk of the announcements carried with them the same old rhetoric that suggested the company considered itself undervalued and had faith in the economy proving its resilience to the effects of terrorism – one would have thought that the re-purchase programs would be mopping up all this ‘cheap’ stock?

Company    Re-purchase Plan   Amount Re-purchased  
   
 DIS        $7.5 billion       Minimal  
  
 CSCO       $3 billion         $350 million  
   
 YHOO       $500 million       $60 million  
   
 MWD        $1 billion         $300 million  
   
 FBF        $4 billion         $1 billion  
   
 ACI        6 million shares   357,000 shares  
  
 PEP        $2 billion         $1.7 billion

Plaudits should certainly go to the likes of General Electric, which re-purchased approximately $800 million of its stock in the days following 9/11 as part of an ongoing $22 billion program that began in December 1994. PepsiCo PEP:NYSE) can also be singled out as living up to its announcement with the aggressive re-purchase of its stock. However, Growth Report views many of the companies announcements as having little more than a cosmetic promotion of seemingly undervalued opportunities that when push came to shove could not be followed through by management – at least in the short-term. Wasn’t that short-term the same period that the companies were extolling the undervalued nature of their shares to you the investor?


Happy Investing,
Doug Ramshaw
Editor-In-Chief

http://www.growthreport.com/