In tumbling markets, investors hope companies and high-level executives take a leaf out of
songbook and stand by their stocks.
But with a few notable exceptions, corporations haven't been buying back shares at anywhere near the rate seen when stock prices were a lot higher, according to people who follow this activity. Meanwhile, stock purchases by individual executives using their own cash also have dropped off sharply.
The decline in corporate stock buybacks contrasts unfavorably with the steep market dips of 1987 and 1998, when companies such as
used the dips in their stock prices to dramatically step up repurchases. The market swoons in those years were short-lived.
The current drop in corporate buybacks, however, could signal a repeat of 1990 and 1991, when repurchases slumped amid a slowdown in economic growth. If companies aren't buying, it's a sign that they believe their stocks have further to fall. After all, if the profits outlook continues to deteriorate, companies themselves should be first to know.
Propping It Up
Source: Merrill Lynch
The fact is, the lower the
price-earnings ratio of a stock, the more attractive a buyback becomes, all else being equal. When P/Es are dropping and interest rates are declining, buybacks should become more common, not less. However, if earnings are also declining, forward-looking P/E may not come down dramatically and repurchases look less compelling.
A batch of big-name firms have this year announced substantial buyback programs.
said in February that it's starting a new $10 billion program, while
AOL Time Warner
announced in January plans to repurchase $5 billion of its own stock. Notable pledges also came from
, for a repurchase worth $1.5 billion,
, for $1.2 billion,
, for $650 million, and
, for $500 million.
What really counts, however, is whether companies are actually carrying out their announced plans. Charles Plohn, head of the special equity transactions group at
, says that actual implemented buybacks have dropped to levels seen in 1996 and 1997. Plohn declined to give the precise numbers but added that in 1996-97, implemented buybacks were well below the record 1998-2000 period.
"Companies are stepping aside and taking a wait-and-see attitude," says Plohn.
In 2000, Merrill estimates that a record $280 billion worth of buyback programs were announced. So far this year, $38.7 billion of buybacks have been announced, according to
Securities Data/Thomson Financial
. Clearly, that number is well below the $70 billion quarterly average in 2000.
This should be cause for concern. In 1990, economic growth decelerated, stocks fell and earnings tanked. Meanwhile, announced buybacks plunged nearly 30%, to $51.5 billion from $72.4 billion in 1989, according to Merrill. Although stocks rebounded in 1991, buybacks sank again to $21.8 billion and didn't exceed the 1989 total until 1994. When fundamentals are uncertain or bearish, it appears that companies hold on to their cash and buybacks decline in importance.
Compare this with 1987 and 1989. Sure, stock indices declined sickeningly in both years. But the outlook for earnings remained strong. As a result, announced buybacks ballooned 83% in 1987 and swelled 14% in 1998, mostly as a result of activity in the fourth quarter, when the near collapse of
Long Term Capital Management
wracked the markets.
The issues determining the usefulness of a buyback are well illustrated by a company such as
, which would seem to be a prime candidate for a dramatic increase in its share repurchase program. The chipmaker has $14 billion of cash on its balance sheet and a stock that's down two-thirds from its 2000 peak. But as analysts slash their earnings forecasts, Intel's projected 2001 P/E has jumped to 36 from 22 in September last year, thus making a buyback harder to justify financially.
Intel spokesman Tom Beermann says that Intel already spends about $1 billion a quarter buying back stock and isn't in the habit of changing that amount based on where its stock price is. In addition, the company needs its cash to help fund capital expenditure and acquisitions, Beermann says.
It's worth remembering that a buyback can magnify the effect of any recovery that may occur. Take battered software firm
, which announced a $500 million buyback plan in August. This move won the applause of Greg Jackson, a manager for the
fund group, which holds shares in Novell. Jackson believes the company's fortunes are about to turn around, so any improvement in earnings will be leveraged, as the buyback should reduce the outstanding share count and thereby boost earnings per share.
While buybacks can give clues about a company's outlook, investors would be ill-advised to use them as a trigger for buying into a stock. AOL's stock is off a bruising 20% since its buyback announcement in January, for example. In addition, a sharp, marketwide decline in buybacks doesn't necessarily mean that a recovery is far off. The
jumped 26% in 1991, when repurchase announcements were few and far between.
That said, it would be encouraging to see more companies get bullish about their own stocks. In fact, it'd be nice if some executives, many of whom have become extremely wealthy by cashing in their virtually risk-free options, would step up to the plate. But insider buying is falling. In February, the dollar value of insider purchases totaled $144 million, down from $150 million in January, and well below the 2000 monthly low of $195 million, according to Lon Gerber at
Lancer Analytics/Thomson Financial
Stunningly, insider-selling is accelerating, to $4.2 billion in February, compared with $3.7 billion the previous month, according to Lancer.
However, investors choking with rage at stock-selling executives should remember that there are a few corporate leaders who still have faith. Wilf Corrigan, CEO of semiconductor firm
, spent $470,000 of his own money buying his company's stock in January.
That's only a small part of Corrigan's wealth, but as Tammy might put it, especially in times like this: there's a man to stand by.
As originally published, this story contained an error. Please see
Corrections and Clarifications.