Merrill Buying Back Stock

Analysts praise the big broker's effort to better manage its capital base.
By Matthew Goldstein ,

Merrill Lynch

(MER)

, which led the way on Wall Street in cutting costs during the bear market, may be starting a new trend with its plan to buy back up to $2 billion in stock.

The nation's biggest brokerage announced the buyback program before the start of trading Tuesday and the news gave an immediate lift to the firm's stock. In early trading, shares of Merrill rose 83 cents, or 1.4%, to $58.56, even as many other financial stocks opened lower.

Based on Merrill's current stock price, Merrill, if it carries through on the buyback plan, would repurchase roughly 35 million shares, or 4% of its outstanding stock.

Glenn Schorr, a UBS brokerage analyst, estimated that if the brokerage repurchased all those shares this year, it would result in a 10-cent-a-share improvement in Merrill's full-year earnings.

Schorr, in a research note, called the Merrill buyback plan a "significant" attempt by a Wall Street firm to bolster its return on equity. Those numbers have tended to lag at Wall Street brokers compared to other big financial services firms.

"Given the pressure on ROEs for the industry, the fact that MER is the first broker willing to manage its capital base in order to generate solid ROEs going forward is a significant message," said Schorr.

Last year Merrill's return on equity, a measurement that essentially helps shareholders determine how much bang they are getting for their buck, was about 16%. By comparison,

Citigroup's

(C) - Get Report

ROE was 19%, while

Bank of America

(BAC) - Get Report

boasted an ROE of 21%.

Over the past year,

Bear Stearns

(BSC)

is the only other major U.S. brokerage to announce a share buyback plan, according to Thomson Financial. But Bear's $1 billion buyback, announced in January, is but half the size of Merrill's.

In past years, investors have seen buybacks as way for companies to increase shareholder value and bolster the stock price. But academic studies have found that companies often don't follow through on buybacks and fail to repurchase all the shares they promise to buy.

For the year, Merrill's stock has been flat, but last year it gained about 55%. The stock trades at a forward price/earnings ratio of 14, based on the Thomson Financial First Call consensus earnings estimate, which has the brokerage earning $4.14 a share in 2004.

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