Microsoft, H-P, Nike Snap Buyback Slump
Stock Repurchases Totaling $53 Billion
Come as Other Firms Are Conserving Cash
By ROBERT A. GUTH and PUI-WING TAM
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Some companies are putting "money on the table again," said Howard Silverblatt, senior index analyst at Standard & Poors. "We haven't had many of these announcements recently because everyone's been so nervous" about using cash.
Microsoft's share buyback, to be spread over five years, is the single biggest repurchase disclosed this year, outstripping International Business MachinesCorp.'s $15 billion plan announced in February. H-P said it authorized another $8 billion buyback after two similar ones last year, and Nike said it would repurchase $5 billion of its stock.
Buybacks are often a response to stock declines -- shares of all three companies have been gyrating in recent days -- since they tend to boost investor confidence and can seem a good way to use excess corporate cash. Trimming shares boosts a company's per-share earnings, since the profit is divided among fewer shares. Last Friday, the Securities and Exchange Commission eased buyback rules so that corporations have the flexibility to purchase in one day up to 100% of the average daily trading volume of their stock.
Microsoft, H-P, and Nike said their new buybacks are part of the normal course of business, rather than being related to market volatility. H-P, the Palo Alto, Calif., computer giant, said its buyback program is intended to manage dilution created by shares it issued for employee stock plans; the company also said it often seeks to repurchase shares "opportunistically." Nike, of Beaverton, Ore., and Microsoft, of Redmond, Wash., said their new repurchase programs are part of efforts to return value to shareholders by using cash to repurchase stock.
In 4 p.m. trading on the Nasdaq Stock Market, shares of Microsoft were up 24 cents at $25.40. Microsoft's $40 billion buyback authorization was accompanied by an announcement that it will raise its quarterly dividend by two cents a share, or 18%, to 13 cents.
On the New York Stock Exchange, H-P shares were down $1.10 at $47.16 and Nike was off 55 cents at $63.15 on a day when the overall stock market was down.
The three companies had embarked on large share-repurchase programs in the past. Microsoft began buying back $30 billion worth of shares in 2004 to reduce its enormous cash reserves and boost its stock price. H-P authorized two $8 billion share repurchase programs last year. Nike is in the final stages of a $3 billion buyback.
But the new programs contrast with slowing buyback activity overall. Corporate stock repurchases, which had been on a tear since late 2004, peaked in the third quarter of 2007 at $172 billion and fell to $114 billion in the first quarter of this year, according to S&P. S&P plans to release new figures Tuesday that show share buybacks dropped to less than $100 billion in the second quarter. The decline coincides with the slowing housing market and the credit crunch, which have led to Wall Street turmoil and other fallout.
Microsoft's board also gave approval for the first use of debt in the company's 33-year history, authorizing it to take out up to $6 billion in debt and to establish a $2 billion commercial paper program. Microsoft said it will use the proceeds from any debt financing for general purposes, including stock buybacks.
Earlier Monday, S&P rated Microsoft AAA, its highest grade and S&P's first new AAA rating in a decade.
Microsoft's board approval for debt comes as the market is seeking credit-worthy commercial paper amid the recent crunch, something Microsoft acknowledged. Microsoft treasurer George Zinn said, "The company's strong credit quality coupled with investors' current appetite for high-quality paper provides a unique opportunity for the company to establish its first-ever commercial paper program and enhance its capital structure."
Microsoft's reworking of its capital structure comes at the hands of Chief Financial Officer Chris Liddell, a former paper-industry executive who has helped guide the software company through $40 billion of share buybacks in recent years and is a strong proponent of Microsoft reducing its cash reserves. As of June 30, the company had about $23 billion in cash and short-term investments. Its market capitalization is about $230 billion.
Microsoft's finances have always been run conservatively, starting in its early years when co-founder Bill Gates followed a policy of having enough cash on hand to run the company for a year without revenue. Microsoft Chief Executive Steve Ballmer maintains a similar desire for the company to have a large cash holding, Microsoft executives say.
Still, Mr. Ballmer has regularly expressed frustration with the company's long-languishing share price. That has led the company to return about $115 billion to shareholders through buybacks and dividends over the past five years. The stock has traded below $30 for essentially all of the past six years.
Write to Robert A. Guth at rob.guth@wsj.com and Pui-Wing Tam at pui-wing.tam@wsj.com
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Questions:
- Why companies buy back shares?
- What are the legal restrictions under the U.S. Federal law on companies' repo of its own shares?
- Does Chinese securities regulation prohibit companies from buying back their own shares? To what extent is it allowed?
1 comment:
Stock Buybacks May Create A Conflict Of Interest
Abstracted from: Can You Have Your Stock And Sell It, Too?
By: Randy Myers
CFO - November 2006, Pgs. 99-102
Dividends vs. buybacks. Not long ago, the preferred method of returning excess cash to shareholders was through dividends. Although many companies continue to pay dividends, many more boards these days prefer not to be locked into regularly scheduled payments. Instead, issuers are using excess cash to repurchase their shares on the open market. Recent studies indicate that stock buybacks are rapidly outpacing the issuance of dividends in public companies. In 1980, for example, S&P500 companies repurchased shares with a value equaling just 10% of the amount of their dividends; 21 years later, the value of share repurchases as a percentage of cash returned to shareholders had risen to 51%, while the value of dividends paid was just 32%. Simultaneous with this trend has been the rise of stock options as a significant component of executive compensation, and an increasing concurrence of companies repurchasing shares while their executives sell shares they received through their options. Randy Myers suggests that the buyback program raises a questionable conflict of interest.
Benefits of repurchasing shares. Executives and directors usually cite the many benefits to stockholders as justification for share buybacks. Unlike dividends, share repurchases allow for financial flexibility. Repurchasing increases the per-share earnings and signals the capital markets that the board feels the stock is undervalued, thus triggering additional buying. However, the author reports that recent studies dispute the common wisdom, which holds that buybacks boost share price. Share repurchases during the 1960s and 1970s did increase stock prices, but this effect had nearly disappeared by the 1980s. Some companies have spent millions to repurchase their shares, only to see the stock price drop significantly after the buyback program ends. Dell Computer, for one, in 2005 spent more than $7 billion to buy back shares priced in the mid 30s. By the end of the year, the price had fallen to the low 20s.
Potential for conflict. Academics and practitioners are becoming more vocal about the conflicts inherent in the simultaneous selling of shares by the executives who authorize the buyback programs. Warren Buffet, in his 2005 annual letter to shareholders, commented on this practice. Shareholders are taking notice, the author indicates, and are instigating lawsuits. The settlement in an action brought by Sprint Nextel shareholders, for instance, prohibits insiders from selling shares while the company is buying them. Other critics of simultaneous buying and selling note that option holders do not receive dividends, so the only way that they can realize a profit is by selling their stock. Another factor encouraging option holders to promote a buyback program over a dividend declaration is the fact that dividends dilute the value of options, because the stock price drops to reflect the amount of dividends disbursed. Critics further contend that many executives are compensated based on a per-share earnings target, which is more achievable after stock repurchases.
Future considerations. Some of the most aggressive simultaneous buying and selling has occurred at USANA, which has spent $130 million repurchasing its shares over recent years. In 2005, the company spent $50 million on the buyback program; at the same time, insiders sold stock worth $64 million. USANA's CFO cites a number of reasons for this coincidence, the author notes, including the dramatic rise in share price and the need for executives to diversify. Establishing a 10b-5 plan-which allows executives to sell shares at any and all times, not just during certain windows of opportunity-is one way to deflect criticism. However, these programs require significant planning by the participants, who must determine the amounts, prices, and dates of stock sales in advance. Most activists pursue insiders who sell on a discretionary basis, not under the aegis of a prearranged trading program. One activist has identified 16 companies with market caps exceeding $100 million that display high levels of simultaneous stock repurchases and insider selling.
Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210. To subscribe, visit www.cfo.com for more information, call (800) 877-5416.
http://www.bowne.com/securitiesconnect/details.asp?storyID=1404
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