Very interesting!!!! 3. Investors Cheated by Stock Buybacks?
BusinessWeek has the inside scoop on stock repurchases - and it's not pretty.
This week's issue features an article titled "The Dirty Little Secret About Buybacks," which points out that stock buyback programs aren't boosting the fortunes of average investors. In fact, they might even be costing investors some money.
BusinessWeek points to Intel as an example.
"Reading Intel Corp.'s latest annual report, you might think the chipmaker has returned huge sums of cash to its shareholders through stock buybacks," says the magazine.
"Since 1990, the report boasts, the company has repurchased from shareholders ?2.2 billion shares at a cost of approximately $42 billion.' That's a lot of stock - about a third of Intel's total shares outstanding. There's just one problem: Intel had as many shares, split-adjusted, at the end of 2004 as it did in 1990."
Most of that money went to support "hundreds of millions of shares" that Intel was issuing for employee stock options, the magazine reports. Joseph Osha, a semiconductor stock analyst at Merrill Lynch, tells the magazine that half the cash devoted to stock buybacks in general serves as little more than "backdoor compensation" for employees.
And Howard Silverblatt, a stock market analyst at Standard & Poor's, estimates that the companies in the S&P 500 stock index spent some $315 billion on their own shares last year - nearly 2.5 times as much as in 2002.
That frantic pace should continue, he tells the magazine, as public companies flush with cash accumulated since the end of the recession in 2001 continue to plow money back into stock buyback programs.
"The logic of buybacks is sound," says BusinessWeek.
"Companies with excess cash return some of it to shareholders by buying shares from them. Since there are fewer claims on the company, each shareholder's stake becomes proportionately larger. Plus, without buybacks, investors in some companies would see their stakes significantly diluted by options."
"The point behind the stock buybacks is to return value to shareholders," Intel spokesman Tom Beermann tells the magazine. "There is no other reason."
That's all well and good if you can discern how much of that cash finds its way back to investor's portfolios. But you can't.
Thomas M. Doerflinger, an equity strategist at UBS, conducted a study on "vanishing buybacks." He discovered that the number of shares in the S&P 500 has continued to increase despite the bigger share-repurchase outlays by companies.
"In 2004, when companies reported spending some $197 billion on buybacks - nearly 2% of the market value of the index - the number of shares outstanding increased by 1.8%," says Doerflinger.
"In the 12 months through June 2005, shares increased 0.7%, and only a third of the companies actually shrank their share counts by at least 1%."
BusinessWeek, citing the UBS reports, points to Microsoft as an example.
"During its three fiscal years ending in June 2005, the company reported spending $18 billion to buy back 674 million shares. At the same time it issued 666 million shares for $8 billion. In the end, Microsoft, which has some 10.6 billion shares outstanding, had reduced its total count by a negligible 8 million shares and had spent just $10 billion - $6.6 billion after tax," said the article.
"Yet Microsoft execs present the gross sums they spend repurchasing stock as being on par with dividends they pay, including the huge $33 billion special dividend in December 2004."
BusinessWeek does say that more companies are taking steps to cut their share counts.
During the 12 months through June 2005, 108 companies in the S&P 500 reduced their counts by 2% or more, up from 55 companies the year before. And 41 reduced shares outstanding by at least 5%, including Intel. Cisco Systems cut its count by 6%, and Dell pared its outstanding shares by 4%.
But it's a hard slog for investors, as many of them aren't even aware that the companies they're investing in are giving them the shaft.