Capital Markets

Is It a Buyback Yet? Campbell Says Yes

More companies are announcing repurchases of beaten-down shares, though it's too early to say if a trend is emerging.
Stephen TaubJune 30, 2008

With U.S. stock prices averaging about 20 percent below last year’s highs, a number of companies are repurchasing their beaten-down shares. A widening trend? It’s too early to tell, because repurchases do, of course, have a downside that must be weighed.

Campbell Soup announced a repurchase program designed to buy up to $1.2 billion of outstanding shares in open market and through privately negotiated transactions. The program will be in place through the end of Campbell’s 2011 fiscal year. The program adds to the soup company’s ongoing practice of buying back shares to offset those issued under incentive compensation plans.

The plan “reflects the ongoing confidence we have in Campbell’s long-term growth potential and is a continuation of our commitment to enhance shareowner value,” said Douglas R. Conant, Campbell’s president and CEO. The company said it expects to complete the repurchase program in fiscal year 2008, using about $600 million of net proceeds from the sale of the Godiva business.

Also, KLA-Tencor said that directors authorized repurchase of 15 million of the company’s outstanding shares, to be completed within 15 months. This authorization is in addition to previous authorizations, the maker of semiconductor products said.

And H&R Block said its board authorized $2 billion of share repurchases during the four-year period through fiscal 2012, stressing that initial purchases are not anticipated prior to the fourth quarter of fiscal 2009. The new authorization replaces and increases the prior remaining repurchase authorizations of 22 million shares. “This is an authorization only, and there can be no assurance as to the actual volume of share repurchases in any given year, if any, which will depend on results of operations, financial condition and market conditions at any given time,” the tax preparation concern said in its announcement.

According to Standard & Poor’s, buybacks among companies that comprise the S&P 500 Index rose for four straight years ending in 2007. In this year’s first quarter, however, companies in the index repurchased $113.9 billion of their shares, down slightly from $117.7 billion a year ago.

Still, Bloomberg reported that a number of companies that comprise the S&P 500 are in a good position to make repurchases. It noted that Eastman Kodak Co., which last week announced a $1 billion share buyback, is one of 28 S&P 500 companies that have had cash double in the past year, with debt falling. Bloomberg pointed out Merck & Co. and Ingersoll-Rand Co., to name two, had more cash than Kodak.

Companies that are cash-rich, and that anticipate improving business, may be inclined to buy back shares or raise their dividends. However, if they are concerned that their businesses are contracting, they may want to hold on to their cash, in case conditions deteriorate more than expected. According to Bloomberg, excluding banks and homebuilders, Altria Group Inc. is the only other company whose cash doubled to a higher level than Kodak’s while debt declined. It announced a $7.5 billion buyback in March. Since then, it shares have fallen more than 8 percent.

Another possible hazard of buybacks is the possibility of downgrades.

Standard & Poor’s, for example, last week lowered AutoZone Inc.’s corporate credit rating to BBB from BBB after the auto parts retailer’s announcement of a boost in its share buyback program. The ratings service did affirm the company’s A-2 short-term and commercial paper ratings, with a stable outlook.

“The rating reflects AutoZone’s leading position in the stable but highly competitive retail automobile parts aftermarket along with its consistent operating performance and strong profitability measures,” Jerry Phelan, an S&P credit analyst, said. Still, S&P said the rating reflected AutoZone’s tendency toward aggressive share repurchase activity and expectations for continued flat-to-negative same-store sales resulting from a weak economy.