Capital Markets

Buybacks Surge, with Uneven Results

Technology companies have especially been eager to enhance shareholder value, but the strategy doesn't always work.
Stephen TaubNovember 7, 2005

For example, Qualcomm Inc. announced on Monday that its board of directors approved a new $2.5 billion stock repurchase program to replace its previous program, which had about $1 billion remaining. “Our goal is to drive higher EPS growth in conjunction with our excellent cash-flow growth prospects,” said chief executive officer Paul E. Jacobs, in a statement.

Last Friday, Honeywell disclosed that its board had authorized the company to buy back up to $3 billion of its common stock. “Our confidence in the long-term growth and profitability of our businesses enables us to strategically redeploy cash both organically and through acquisitions, while also returning value to our shareowners through dividends and share repurchases,” said chairman and CEO Dave Cote, in a statement. Since the fourth quarter of 2003, Honeywell has repurchased about 42 million shares, valued at $1.5 billion.

And TXU announced that its board authorized the company to buy back up to 34 million common shares, on a split-adjusted basis, through the end of next year. This year, it expects to buy up to 12 million shares. The utility added that it would boost its dividend by 47 percent and split its stock two-for-one.

As we have pointed out a number of times, companies buy back their shares for two major reasons. They either want to boost the stock price by spreading their earnings over fewer shares, or they want to avoid dilution after options have been exercised. Clearly, the goal of Qualcomm, Honeywell, and TXU is the former — to enhance shareholder value.

Technology companies have especially been eager to embrace this strategy. According to The Wall Street Journal, tech companies in the Standard & Poor’s 500 repurchased nearly $50 billion of their stock during the first half of this year, nearly matching last year’s record $52 billion for the sector. That strategy isn’t working for a number of tech companies, however, the Journal noted.

Cisco, for example, launched a $3 billion repurchase program in 2001 and subsequently added several billion dollars to the plan. As a result, the networking company reduced its shares outstanding from 7.4 billion shares in late 2001 to roughly 6.3 billion shares, according to the paper. Cisco’s share price surged from $14.47 when the buyback was announced in late 2001 to more than $20, but they fell below $10 the following year, and the stock closed Friday at $17.87, reported the Journal.

The newspaper also pointed out that when Microsoft announced its $30 billion, four-year stock-buyback program in July 2004, its stock was trading at around $28; on Friday, the stock closed at $26.66. A Microsoft spokesman declined to comment to the paper.