In an otherwise well-done article on Lehman Brothers (LEH) , The New York Times fell for a basic Wall Street ruse concerning stock-buybacks. The column, Lehman's Assurances Ring Hollow, portrayed a corporate buyback of stock as a definitive sign that a company is truly confident about its future.
First, let's differentiate between a sizable insider purchase and a company stock-buyback plan. When an individual company executive or board member buys a large amount of stock, the investment can be proof of confidence in the company's future. Sometimes it's misguided confidence, sure, but generally it's heartfelt. Why? Because that person is putting his own money on the line and, done at the right scale, that personal vote of confidence counts for something.
But when a company buys back its own stock with company money -- well, the reality, no matter what the scale of the buyback, is far more complicated.
They Just Don't Get Buybacks!
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article looked back over the assurances -- many of them now suspicious -- that Lehman Brothers gave on conference calls over time.
did an excellent job of organizing and exposing these assurances. But here's where the column went wrong.
When recounting a conference call last December during which Lehman's new CFO described the company as well-positioned for the downturn and ready to benefit from the stabilizing fixed-income market,
offered this take:
"Lehman was so confident that in January it stepped up its share repurchases, spending half a billion dollars in one month."
There you have it. According to the business media, a company that buys back its stock is a confident company. Simple as that. Corporate buybacks are proof of confidence.
Well, since the business media won't in this case, let The Business Press Maven play the skeptic.
Even assuming that a company buys back as much stock as it announces it will (another can of worms altogether) company officials are not using their own money when they announce such buybacks. This means that it
be a legitimate reflection of confidence, but it
might just as well
be a false show, a hollow gesture of confidence to embolden investors.
Who is to say? They are not using their own money.
Even when the buyback goes beyond a gesture designed to impress investors and the business media, it might have no long-term meaning. Troubled, reeling companies (like Lehman) might merely be trying to support the stock a bit in the short run, to buy company officials some time for various (but obvious) reasons.
Don't forget too that a lot of companies -- especially on Wall Street -- pay as much in company stock as they do in salary. That gives even more incentive to buy back stock, as company officials have to keep that most important constituency (the employees) in the fold.
Prop up the stock a bit or, at least, give them the false show of confidence and you buy more time. In these cases, too, the company is giving out a lot of stock to employees and issuing stock for other reasons, so they are often looking to keep the float the same. Which, again, is different from true confidence.
Anyhow, as always, trust your friendly neighborhood Business Press Maven. When a company official buys a good chunk of a stock, that can be evidence of a legitimate level of confidence. But when a company buys up its shares itself, think twice. Maybe even three times.
At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers and a money manager before becoming a journalist who wrote The New York Times' "County Lines" column for six years. He also did back-up beat coverage of The New York Knicks for the paper's Sports section for two seasons and covered other professional and collegiate sports. He has contributed frequently to many of the Times' other sections, including National, Metro, Escapes, Style, Real Estate, Arts & Leisure, Travel, Money & Business, Circuits and the Op-Ed Page. For his "Business Press Maven? column on how business and finance are covered by the media, Fuchs was named best business journalist critic in the nation by the Talking Biz website at The University of North Carolina School of Journalism and Mass Communication. Fuchs is a frequent speaker on the business media, in venues ranging from National Public Radio to the annual conference of the Society of American Business Editors and Writers. Fuchs appreciates your feedback;
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