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The Buyback Backlog

The amount of announced share repurchases is climbing, but actual buying activity is sluggish. Why?
Vincent Ryan, CFO.com | US
July 28, 2010

While stock-buyback programs have returned to popularity in 2010, the evidence is that the execution of these programs is happening very slowly — if at all.

An analysis by CFO of data provided by Capital IQ found that 623 U.S. companies announced buybacks during the past 12 months, for a total of $209.5 billion. But of those companies, only 294 have actually repurchased any stock, spending just $27.3 billion of their authorized total of $78.4 billion, according to the latest data available in early July. (The data includes both tender offers and open-market transactions.)

"My impression is that companies are exhausting their repurchase authorizations at a very slow pace," says Michael Gumport, founding partner of MG Holdings/SIP.

Buyback programs can last for three or even four years, so repurchases don't have to be made immediately. And by some accounts, only about a third of buybacks are ever fully executed. (The language in the announcements usually says "the program may be suspended or discontinued at any time and no assurance can be given that any stock repurchases will be made under this program.")

"It's not uncommon to see a company announce a buyback in order to relieve some of the pressure from shareholders," says Frank M. Placenti, chairman of the corporate finance and government practice at law firm Squire, Sanders & Dempsey. "But there's no way it needs to be done in a particular time" — or at all. (Legally, a company can't announce a buyback without a good-faith intention of doing something about it, notes Placenti.)

It's the market that usually drives the pace at which shares are bought back, says Placenti. "Sometimes the [share] price will run away, or the company's own purchasing creates upward pressure," he says, so the company decides to stop buying. "Most clients purchase judiciously — you don't want to rush into the market and spike the share price."

"In my experience with my clients it's been a slow, long process," says Erin M. O'Reilly, director of Strategic Stock Surveillance, a unit of Miller Tabak. "They buy at market prices favorable to them."

Panera Bread, for example, is laser-focused on the return-on-investment aspect of buybacks, and content to sit back when share prices aren't favorable. An owner and franchisor of bakery-cafes, the company announced a three-year, $600 million repurchase in November 2009. As of the end of March, however, it had bought back only $1.73 million worth of shares, according to Capital IQ. (On Tuesday Panera updated the number to $80 million in shares repurchased, as of the first 27 days of the third quarter.)

The slow execution makes sense from a return standpoint, given the stock's valuation. Panera's shares climbed from the low $60s to the high $80s from the announcement until late April. The stock is now hovering in the mid-$70s.

"The stock shot up, which is a pretty typical response" to a buyback, says Michele Harrison, Panera's vice president of investor relations. Panera's board of directors sets target buyback levels based on long-term hurdle rates and uses a sophisticated grid to guide execution, she says. Currently, Panera's multiple is high, but the company believes that as same-store sales comps come down, the multiple will return to a more normal level and Panera will be able to meet its share-purchase target. "We don't believe it's right [the decline in multiple], because the business dynamics don't change," says Harrison. "But that's just the way investors think about share price."

When a company buys back slowly, it can also signal other things, says Placenti. Bowing to pressure from shareholders, "the company may have only adopted the plan reluctantly," he says. "Or management may honestly believe there are better uses of cash coming."

In the current uncertain economy, CFOs may also be trying to strike a balance between satisfying shareholders with a buyback and preserving a healthy cash cushion.

Indeed, contrary to what buyback announcements are supposed to signal to investors, they're not necessarily a priority use of cash. "We've been pretty consistent buyers over time; I can't say we only buy when the stock looks cheap," says Michael J. Monahan, vice president of investor relations at Ecolab, a maker of cleaning and sanitizing products for the hospitality and food-service industries. Ecolab announced an additional repurchase program for 10 million shares in late February, and in one month it bought back 577,272 shares. (At the end of 2009, Ecolab still had 2.7 million shares yet to be bought from a program announced in October 2006.)

The program's primary aim is to neutralize the effect of employee stock options on the company's fully diluted share count. "You have a certain number of shares as a rough objective," says Monahan. Secondarily, the company uses share repurchases to maintain its debt-to-capital objective; when that drops too low, it will get more aggressive on buybacks. But that's only if there is a lack of acquisition activity, stresses Monahan.

In order of priority, issuing a dividend in line with earnings growth is Ecolab's number-one use of cash. Investing in the business or making acquisitions is number two, followed by buybacks.

With the S&P 500 down 9% from its April high, companies may start to buy back shares faster. So far, however, there's little evidence of that.




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