Switch to buybacks smacks of a vote of no confidence

September 15, 2004|By Jay Hancock

CORPORATIONS, I know what you didn't do last summer.

You didn't spend much of your enormous cash hoards on building factories or buying equipment. You didn't hire many employees. You didn't give good raises to the workers you had.

And now we know what you did do.

The biggest corporate cash pile at least since the 1950s is being spent largely on stock repurchases, in which companies retire shares outstanding to give remaining holders a bigger ownership stake and boost earnings per share.

In July, U.S. companies announced plans to buy back $46 billion in stock - the second biggest month for repurchases in more than 15 years, according to TrimTabs Investment Research of Santa Rosa, Calif. If corporations announce buybacks this fall at the same rate they did in the year's first eight months, 2004 will produce a quarter-trillion dollars in initiated repurchases, a record.

Cable operator Comcast Corp., for example, announced the repurchase of $1 billion in stock in December and another $1 billion buyback in July.

"Having gone through what happened with the downturn over the past few years, many companies have pulled back - whether operationally or from a reinvestment perspective - and now find themselves generating significant amounts of cash. And that's not just Comcast," says Bill Dordelman, the company's vice president of finance. "We wanted to make sure that the shareholders were a beneficiary of a portion of that."

But the buyback surge has disturbing implications for the larger economy.

Money spent on repurchases diverts dollars that could go toward hiring, equipment upgrades and other activity that would spur the nation's lackluster job growth and capital investment. By investing in buybacks instead of operations, U.S. corporations have cast something of a no-confidence vote in the economy - and raised the probability of the bearish outcome they fear.

"Businesses are fairly cautious about spending money," says Sung Wong Sohn, chief economist for Wells Fargo Bank. "They have not forgotten the lessons of the past three years or so. Global competition - from China to Europe - has intensified."

The $1 trillion U.S. corporate cash balance as of June was the biggest such stash, as a balance sheet portion, in decades. At Comcast, cash reserves grew from $214 million at the end of 2001 to $1.6 billion at the end of last year even after the company retired billions in debt from its acquisition of AT&T Broadband.

The economywide cash buildup surging into buybacks and, in some cases, higher dividends benefits shareholders, but doesn't electrify the economy as job growth and capital upgrades do.

Comcast's capital spending is falling from $4.3 billion last year to about $3.3 billion this year and is estimated to be less than $3 billion next year, Dordelman said.

The company had held back some cash when it offered to buy the Walt Disney Co. several months ago, but abandonment of the Disney attack prompted a new buyback announcement in July. Comcast pays no dividend.

In a way, today's cash-management picture mirrors that of the 1990s, when companies overbuilt and created capacity for business that never materialized. Now corporations may be too cautious even when they can afford to invest.

"In the olden days businesses used to expand capacity in anticipation" of sales expansion, said Wells Fargo's Sohn. "Today, businesses would rather see their capacity used up and then expand capacity because they have to - not in anticipation."

The market often looks favorably on buybacks, believing they'll enhance shareholder value. But executives ordering buybacks are not disinterested. They generally hold options in the shares being repurchased.

"When they buy back, they boost their stock prices, so their options are worth more, so as they see it everybody wins," says TrimTabs President Charles Biderman.

I'm not suggesting that's the motivation at Comcast, but it might help explain the national buyback trend. Healthy corporate balance sheets and earnings per share aren't bad things, but by themselves they don't generate a self-sustaining recovery.

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