Dozens of U.S. companies, including at least six based in Colorado, are conducting stock buyback plans collectively worth billions of dollars.
Such repurchase plans have become increasingly popular in recent years, in part because many companies have piled up cash on their balance sheets and perceive stock buybacks as a good use of that capital. Investors, meanwhile, often see buyback announcements as a signal that a company’s shares are poised to go higher.
But some financial experts warn that buybacks are not always a win-win proposition for the company and its investors, as some companies announce buyback plans but then repurchase only a negligible number of shares.
Other companies, including some in Colorado, are simply repurchasing enough shares to cover what they dole out to employees in incentives, said Anne Storsved, a director with Cozad Asset Management in Champaign, Ill.
“Some companies announce it and figure their stock price will go up,” said Storsved, whose firm last month introduced a mutual fund that invests in companies that have announced share-repurchase plans. “Investors need to make sure the companies are actually going through with it.”
Among six large Colorado companies that have recently announced share-repurchase plans, just two, Liberty Global Inc. and Janus Capital Group, actually snapped up a significant number of shares during their most recent fiscal year, according to an analysis performed by Cozad at the request of The Denver Post.
During its most recently completed fiscal year, Liberty repurchased the equivalent of 11 percent of its market capitalization. During the same time period, Janus repurchased the equivalent of 8 percent of its market capitalization.
4 percent average
Meanwhile, three other metro-area companies, Frontier Airlines, Ball Corp. and Qwest Communications, repurchased the equivalent of less than 1 percent of their market capitalizations, the analysis showed. First Data Corp., based in Greenwood Village, repurchased about 2 percent of its market capitalization.
Howard Silverblatt, a senior index analyst with Standard & Poor’s in New York, said the average corporate buyback amounts to about 4 percent of a company’s market capitalization.
While Ball and Qwest were below that benchmark during their most recent fiscal years, both companies have accelerated their buyback programs this year, according to Silverblatt.
Qwest, during the first quarter of 2007, repurchased $393 million of its own shares, compared with $209 million during all of 2006. Likewise, Ball, during the first quarter, repurchased $98.5 million of its shares, compared with $84.1 million all last year.
“In the short run, it’s a win-win for everyone,” said Silverblatt. “The question is, what are those companies doing with the shares?”
Companies conducting share buybacks typically use cash to purchase their own shares in the open market. Members of the Standard & Poor’s 500 stock index spent a record $117.7 billion on stock buybacks during the first quarter of this year, up 17.5 percent from the first quarter of 2006, according to S&P.
The shares often are used as incentives for executives, to finance acquisitions or to simply reduce the number of tradeable shares. A company that reduces its number of tradable shares can boost how much it earns per share, a key measure of corporate performance.
“Vote of confidence”
David Fried, editor of the Buyback Letter, a publication that tracks corporate buybacks, said savvy investors can look to repurchase-plan announcements for investment ideas.
“When companies buy back their own stocks, it reflects an enormous vote of confidence in the stock by those who know it best – the company’s senior executives,” said Fried, who is based in Pacific Palisades, Calif. “A stock buyback tips you off that the stock is primed to go up.”
However, Silverblatt said it is a bad sign if a company is growing its earnings-per-share number by repurchasing shares – not by reinvesting in its business.
“Hopefully, a company has something better to do with its money,” Silverblatt said.
Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.
