If recent volatility in world stock markets is any indication, investors are having a hard time deciding how much public companies are worth. But there’s one group of buyers that continues to snap up shares through it all: the firms themselves.
Stock buybacks in the S&P 500 rose 41 per cent over the last year to $109 bn in the second quarter of 2011, the eighth consecutive quarterly increase. It’s a string of shareholder-friendly purchasing that has more than quadrupled from the low point in the second quarter of 2009, when the markets were mired in the worst of the credit crisis, and
buybacks dipped to $24 bn.
The recent activity has revived grumbling from pundits who say the money would be much better spent on research and development – an argument often heard in the run-up to the 2008 market crash. Back then, buybacks soared to record levels, reaching a high of $172 bn in the third quarter of 2007.
‘Any top executive who says a share buyback is the best way a company can use its money should be fired,’ states William Lazonick, an economist at the University of Massachusetts Lowell and one of the most vocal critics of the practice.
Mounting a defence
But most IROs defend buybacks as an investor-friendly policy that makes sense. Among the reasons given are that it’s a good way of returning cash to shareholders, it improves EPS and it covers the dilution caused by the granting of employee stock options.
Buybacks, IROs argue, also send a message to shareholders that is especially important in uncertain times – such as when the market is volatile and investors turn skittish.
Buybacks are an ‘illustration of the board’s confidence in the future of the company to our shareholders, as well as underscoring our commitment to enhancing shareholder value,’ explains Marcy Brand, investor relations manager for Southwest Airlines, whose board authorised a $500 mn stock repurchase in August, after the company’s share price had fallen 35 per cent.
‘It’s a matter of looking at our capital base,’ explains Brand. ‘We have a strong balance sheet and liquidity that is currently more than $4 bn, so it’s a way of managing the dilution by buying shares with the overall goal of enhancing shareholder value.’