Stock buybacks, like baseball players and Hollywood starlets, just ain't what they used to be.
Buybacks once were ports in a storm, restoring confidence in flagging shares and on occasion even shoring up weak markets: Recall the effect of
buyback amid the October 1997 crashlet.
Now, April's tech swoon has many investors counting on sector bellwethers to step in with big, market-calming buybacks. But even as Old Economy share repurchases mount, some market pros are saying big tech buybacks may not materialize. Why?
Because buying back shares is cash-intensive, and many
favorites are either strapped for cash or furiously putting it to work to fund innovation and internal growth. And investors have become blase about all but the biggest buybacks anyway, muting the strategy's payoff. So key tech companies, for the moment, are no more eager than gun-shy investors to spend cash on their flagging shares.
Duck and Cover
Buybacks are important because they can indicate management is bullish on its stock. "One of the things buybacks do is give investors more confidence," says money manager David Schultz, of
Summit Capital Holdings
. "As an investor, I'll often take a company's valuation of itself over an analyst's."
Recent weeks have brought some 100 buyback announcements, mostly in beaten-down Old Economy names in insurance, financial services and big industry. Of the buybacks announced this week, the largest have been from insurers
St. Paul Cos.
Other recent big buyback plans have come from chipmaker
, Web media firm
, oil-services concern
and auto giant
Old Economy buybacks are flourishing at the expense of tech ones, market watchers say, in part because of Nasdaq's hair-raising volatility and eye-popping valuations. Companies in industries ranging from cars to energy to finance have seen their shares steadily ignored in recent years, leading them to conclude their shares are undervalued. But even after last month's tech-stock rout, many telecom and Internet stocks still carry outsized valuations, based on conventional metrics. And the sheer size of moves in Nasdaq stocks may be scaring away would-be buyback prospects as well.
"The tech group will come in and do it, but the volatility will have to subside," says Eric Lindenberg, the head of the financial strategies group at
Salomon Smith Barney
With IPO and secondary markets drying up in April's tech swoon, companies are feeling less generous with whatever cash they have. And in highly competitive tech industries, cash used for buybacks is money that can't be used to build the next big product or garner crucial market share.
"On the tech side, those companies need the cash to fund growth, and with the market so volatile it becomes more important to keep a little more cash around" rather than buying back shares, says Solly's Lindenberg.
Investors waiting for a big announcement from a leader such as
must consider another factor: recent acquisitions. Mister Softee, which has done frequent buybacks in the past using both the equity and options markets, can't pull the trigger on one until after June 7 because its acquisition of
was structured as a pooling-of-interests deal, which restricts subsequent buybacks. With such stock swaps common in recent years among tech stocks, investors should be aware that there are plenty of companies that can't do buybacks for a given period.
A Different Dilution
Market pros say buybacks don't inspire the same kind of action as they once did. Lindenberg and others make the point that many buybacks are done routinely by tech companies trying to offset dilution from employee stock grants. And smaller buyback announcements tend to get swept under the rug.
"There's a high skepticism factor with buybacks these days; there's a feeling that companies don't often continue" buying the shares, says Tom Burnett, of
Wall St. Access
. That means that most buyback announcements are greeted by the market with resounding silence.
In any case, investors "want to see the announcement accompanied by the right words," focus on value and feel more comfortable with buybacks that have "size," says Solly's Lindenberg. Size, to an investment banker, means more than 5% of the shares outstanding. "As the percentage of shares starts to approach 10%, the market takes notice," Lindenberg says.
In those cases, says Lindenberg, the firm's studies have shown that large buybacks are often accompanied by "sizable, abnormal returns." For instance, CNet jumped 20% in two days after announcing on April 19 that it would spend $100 million buying back shares. Halliburton popped 4.5% on April 26 when it said it would repurchase 10% of its shares.
That's just the kind of buyback news Nasdaq investors could use about now.