Companies spend their stash of cash to buy back stock
Thursday, October 7, 2010
For months, companies have been sitting on the sidelines with record piles of cash, too nervous to spend. Now they're starting to deploy some of that money - not to hire workers or build factories, but to prop up their share prices.
Sitting on these unprecedented levels of cash, U.S. companies are buying back their own stock in droves. So far this year, firms have announced they will purchase $273 billion of their own shares, more than five times as much compared with this time last year, according to Birinyi Associates, a stock market research firm. But the rise in buybacks signals that many companies are still hesitant to spend their cash on the job-generating activities that could produce economic growth.
Some companies are buying back shares partly because they don't want to invest in developing new products or services while consumer demand remains weak, analysts said.
"They don't know what they want to do with all the cash they're sitting on," said Zachary Karabell, president of RiverTwice Research.
Historically low interest rates are also prompting some companies to borrow to repurchase shares.
Microsoft, for instance, borrowed $4.75 billion last month by issuing new bonds at rock-bottom interest rates and announced it would use some of that money to buy back shares. The company already has nearly $37 billion in cash, but much of that money is being held by its operations overseas. The tech company is reluctant to repatriate the money, because it would get hit with a huge corporate tax bill.
A share buyback is a quick way to make a stock more attractive to Wall Street. It improves a closely watched metric known as earnings per share, which divides a company's profit by the total number of shares on the market.
Such a move can produce a sudden burst of interest in a stock, improving its price.
Among the biggest buybacks so far this year: Hewlett-Packard, the world's biggest maker of personal computers, said in August it would spend $10 billion buying its shares. Its shares rose 1.5 percent after the announcement.
In March, the giant snack-food maker Pepsico announced it would raise its dividend and buy back as much as $15 billion in common stock over the next three years. The company's shares rose 1.6 percent that day.
Last month, the board of The Washington Post Co. authorized executives to buy back as much as 750,000 of the company's Class B shares. Its stock went up 4.3 percent on the day of the announcement.
Hewlett-Packard, for one, said it is doing buybacks to maintain the number of shares outstanding after employees cash in their stock options.