News Column

Corporate buybacks show shareholders the money

August 17, 2014

By Jon Chavez, The Blade, Toledo, Ohio

Aug. 17--Like lovesick schoolboys, U.S. companies, including many in northwest Ohio, have been bursting with affection lately for their shareholders.

The devotion mainly has been shown in the form of stock-repurchase plans. Companies have chosen to use billions of dollars to buy back shares of their own stock. That drives up the value of the remaining shares held by investors.

It "demonstrates our ongoing commitment to returning capital to shareholders," Marathon Petroleum Corp. Chief Executive Gary Heminger said last month in announcing the Findlay oil company's plan to boost its stock repurchase plan by an additional $2 billion.

Not to be outdone, Cooper Tire & Rubber Co., another Findlay firm, showered its shareholders with love on Aug. 7 by announcing an accelerated share repurchase plan that will seek to buy back up to $200 million worth of company shares between now and February.

The move "demonstrates our commitment to continuing to deliver value to shareholders," said Roy Armes, the company's top executive.

Share repurchase plans have been blossoming at a phenomenal rate over the last few years, and while shareholders have been the big benefactors, there is doubt as to whether the stock buybacks were done to reward shareholders or out of financial prudence.

"You have a bit of a chicken or the egg situation," said Sheraz Mian, director of research at Zacks Investment Research, a leading financial data and analysis firm.

If companies weren't overflowing with extra cash, shareholders such as billionaire investor Carl Icahn wouldn't be pressuring companies like Apple Inc. to enact stock repurchase plans, Mr. Mian said. But since the end of the recent recession, companies have become flush with cash, and they must either spend it or let it stagnate, Mr. Mian added.

A stock buyback "is the safest choice," Mr. Mian said.

Of northwest Ohio and southeast Michigan's 17 publicly traded companies, 10 have stock repurchase plans.

Seven of the nine share-repurchase programs were initiated in 2012 or later.

They have been part of a corporate "buyback binge," as Mr. Mian describes it.

According to equity research firm Birinyi Associates Inc. of Westport, Conn. corporate boards authorized $59 billion worth of share repurchases in July, a 21 percent increase from the $49 billion authorized in July, 2013.

Through July, there have been $759 billion in authorized buybacks, which projects 2014 to be the third-highest year for authorized stock repurchases behind $863 billion in 2007 and the $755 billion recorded just last year.

In terms of shares actually repurchased, there have been $314 billion worth of shares bought back in 2014, putting this year on pace to be the second highest year behind $761 billion in 2007.

"I think it's all about a level of comfort. So far in this #8226 market, companies are more comfortable deploying capital into ... buybacks," said Rob Leiphart, an analyst at Birinyi.

What ignited the move toward share repurchase plans was a period of austerity begun by companies during the recession that struck in December, 2007.

"Coming out of 2008 and 2009 and the Great Recession, companies were tightening their belts, they weren't spending money, they were keeping lean and mean operations because they were concerned by a double dip," Mr. Leiphart said.

But as the recovery took hold and companies racked up profits again, they remained lean, he added.

"Companies were flush with cash and now they have to do something with it," Mr. Leiphart said.

Companies will authorize share-repurchase plans for a variety of reasons.

Reducing the number of outstanding shares makes a company's earnings per share and price-to-earnings ratio rise, showing a prettier face to Wall Street and investors.

Reducing shares also makes a company less vulnerable to a takeover.

Some companies initiate share buybacks to signal Wall Street that management believes the company's shares are undervalued and that investors ought to look more closely at the company's performance.

Earlier this month, Dana Holding Corp. appeared to send such a signal by authorizing an additional $400 million in share repurchases to augment the $1 billion in repurchases it has authorized since October, 2012. Since the program began, Dana has repurchased $942 million of its shares.

"The $400 million increase in our share repurchase program highlights our board's continued confidence in the future of Dana. We believe Dana's stock represents an attractive investment in light of our earnings growth, strong free-cash flow, and our robust capital position," Roger Wood, Dana's president and chief executive officer, said in a statement.

Mr. Mian said what companies are saying is, "Look, investors, we are the insiders. We know how the business is, we know how our markets are, and we think you are undervaluing our stock. We think that the best investment alternatively for the cash on our balance sheet now is to buy back our own shares."

While shareholders benefit from buybacks, repurchase plans can increase management wealth because many compensation plans award top executive various amounts of company stock or larger paydays based on earnings per share increases.

"Some would argue it benefits the corporate brass because many get bonuses based on [earnings per share] data," Mr. Leiphart said. "A buyback is something they can control."

But Mr. Leiphart and Mr. Mian said the buyback binge likely is happening because, of all the ways a company can spend cash, buybacks are the least risky.

"Typically, a company could either invest that cash back in their business, use it to buy other companies, pay a dividend, or the last option is to just buy back their own shares," Mr. Mian said.

But if analyses shows market demand isn'?t strong enough to warrant new equipment or employees and acquisition opportunities are limited, "then the questions becomes what to do with all the cash?" he said.

Dividends are one option.

Cooper Tire just announced its 170th consecutive dividend -- a streak of which the company's management is quite proud.

In announcing Cooper's upcoming $200 million buyback, Mr. Armes, the company's chief executive officer, said the company's financial position is strong, and it is committed to increasing shareholder value "over the long term."

Yet Cooper chose to authorize an accelerated stock buyback rather than increasing its dividend.

Mr. Mian said companies are choosing buybacks over raising dividends because of flexibility.

"You could do a dividend or a share buyback. But the share buyback is a more flexible option for management teams than a dividend because a dividend ties them down to a specific rate of return that, over time, they can't get away from," he said. "Shareholders want dividends to be steady but also to be steadily growing. A buyback remains in a manager's control."

Marathon Petroleum, which says it is dedicated equally to reinvesting in the company and returning value to its shareholders, acknowledges that flexibility is what makes buybacks a good strategy to achieve the second goal.

Its latest $2 billion share repurchase authorization will be its fourth buyback since it separated from Houston-based Marathon Oil in 2011.

With share buybacks, "we have the flexibility to buy the shares when we feel the timing is right. We watch the market to make it sure it is done correctly and there is a strategy as to when you want to repurchase the shares," Marathon Petroleum spokesman Angelia Graves said.

Contact Jon Chavez at: jchavez@theblade.com or 419-724-6128.

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Source: Blade (Toledo, OH)


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