Market Watch

[Joemoney]

Stock Buybacks Slow as Optimism Grows

By Nick Olivari

NEW YORK (Reuters) - Stocks are far below their all-time highs, yet companies aren't rushing to buy them up at bargain prices.

That could be seen taken as a sign that companies aren't optimistic about their shares -- but more likely it's another signal that an economic recovery is in the works.

``A lot of buybacks implies there are no other alternatives'' for spending a company's cash, said Anthony Chan, chief economist with Banc One Investment Advisors Corp. which oversees $142 billion in investment funds. But with the economy recovering, companies are investing their cash in real revenue-producing ventures.

Buybacks -- reducing the number of shares trading in the open market -- are generally viewed in the short term as positive for a company's stock price. They increase earnings per share, assuming profits are constant, and bolster the stock in the open market.

While only half of the repurchase programs announced ever come to fruition, according to research firm First Call, some investors suggest that the drop in buybacks may indicate that companies see a better return on their profits in the longer term by plowing them back into the business.

The recent decline in stock repurchases may indicate that ''companies see an economic recovery and there is no better rate of return available than retaining the cash and using it within the firm,'' said Banc One's Chan.

At $34.3 billion, the dollar amount of pending buybacks announced from the start of this year through to March 15 dropped 35 percent from the same period a year ago, according to market research firm Thomson Financial.

That's despite the Standard & Poor's 500 index (NYSE:SPX - news) being 10 points less than where it traded in mid March, 2001, and with the Nasdaq composite index (^IXIC - news) trading down 4 percent, implying stocks overall are about the same price as they were 12 months ago. Both indices are far from the all-time highs attained in 2000, with Nasdaq less than half its best-ever and the S & P average just about three-quarters of its peak.

Still, companies are spending less on their shares, reducing not just the number of buyback programs but also the amount they commit when they launch one, market analysts say.

Recent buyback programs include that of consulting firm Accenture Ltd.(NYSE:ACN - news), which announced a $100 million repurchase program on Feb. 26. New York Times Co. (NYSE:NYT - news) said Feb. 21 that its board of directors authorized $300 million to buy back shares on additional program.

Still, those pale against the last big announced repurchase program, an $8 billion buyback announced by General Electric Co.(NYSE:GE - news) in December, which brought its total buyback authorization to $30 billion.


MARKET NOT IMPRESSED

Stock market investors, for the most part, don't get very excited when companies launch stock repurchase programs.

``Investors are not overly impressed by buybacks for more than a day,'' said Rich Sichel, chief investment officer with Philadelphia Trust Co. which oversees $600 million. ``Companies may see better use for their cash in the long-term by spending on research.''

To be sure, buybacks have their fans and can sway the thinking on Wall Street. For some companies with cash to burn it's a good way to reward shareholders, they say.

Morgan Stanley analysts Henry McVey and Scott Patrick cut their earnings estimates on J.P. Morgan Chase & Co. on Friday, arguing that without repurchases and little revenue growth, there were no big catalysts for a sustained move in the stock.

Other investors say management should be more opportunistic, taking advantage of low share prices when they can to buy back stock.

``There are a lot of money managers out there who are asleep at the switch,'' said Howard Kornblue, a money manager with Phoenix-based ING Funds LLC $20 billion.

``It's the same rationale as any investment situation,'' Kornblue said. ``Buy low and take advantage'' of the price.


ECONOMIC FEARS

While some see a bullish signal in the decline of buybacks, others see it simply as another lingering impact of the weak economy.

``The recession had a negative impact on share repurchase programs,'' said Dan Veru, a money manager with Palisade Capital Management LLC which oversees $2.5 billion in assets.

Some companies may be seeking to retain cash in case corporate profits and the recession have more downside, money managers said.

``But that is precisely when you want to take advantage of a low stock price,'' Kornblue argued. ``You don't have low stock prices when there is certainty and things are looking good.''

Another restraint on buyback plans could be the large number of already-announced repurchase programs still pending, which may partly explain the dearth of announcements so far in 2002, market watchers said.

Through to the first week of March, IBM Corp. (NYSE:IBM - news) had total pending buyback programs totaling $48.5 billion, Intel Corp. had $20.5 billion and Merck & Co. some $20 billion in pending programs, according to First Call data.

Companies like Big Blue tend to use share buybacks as part of their long-term financial strategy -- part of a broader program to increase shareholder value. The world's largest maker of computer equipment spent $44 billion on share buybacks from 1995 through to 2001, about half the amount it spent on research and development, capital expenditure and acquisitions in the same period.

``IBM's share repurchase program is part of an overall program of cash managements and investment,'' said Carol Makovich, vice president of media relations at IBM. ``While we have repurchased our stock since 1995, we have also continued to invest in our business for growth.''

http://biz.yahoo.com/rb/020323/business_bizstocks_dc_2.html