American companies may be losing their appetite for their own shares.
Despite two high-profile stock buyback announcements on Tuesday--from MGM Grand and Time Warner--overall the number of new buybacks announced this year is trailing the pace of the last two years.
So far this year, 522 companies have announced buybacks, according to Securities Data Co. For all of 1997 the total was 1,362. So this year's pace, annualized, is 23% below last year's.
The dollar value of buyback announcements so far in 1998 is $74 billion. That, too, is well off last year's pace, when a record $190 billion in buybacks were announced for the full year.
Companies typically decide to buy back some portion of their own shares when they judge that their stock is the best investment they could make, versus buying another company or investing in new plants or equipment.
That's what motivated casino giant MGM Grand to announce on Tuesday that it will buy back up to 12 million shares, or 20% of its 58 million shares outstanding. The news sent the stock rocketing $5.56 to $32.19 on the New York Stock Exchange.
"We've analyzed every company, public or private, that we were even vaguely interested in," MGM Chief Financial Officer James Murren told Bloomberg News. "We concluded that our own stock is the best buy in the industry."
MGM will buy back up to 6 million shares via a $35-a-share tender offer expiring July 31. Another 6 million shares will be purchased later, "depending on market conditions," MGM said.
MGM's buyback announcement coincided with its warning that second-quarter earnings will be 25 cents to 30 cents a share, well below analysts' expectation of about 40 cents. MGM and other Las Vegas casino operators have been hurt by a falloff in visits by Asian high-rollers, many of whom have seen their wealth devastated by the region's economic crisis.
Time Warner, meanwhile, said Tuesday that its board authorized a 9.6-million-share increase in the company's current stock buyback program, to 53.7 million shares. The company has already retired 40.6 million shares as part of that program, it said.
But the increase is designed to partially offset the issuance of 18.7 million new Time Warner shares to certain debt holders who opted to convert their notes to stock rather than cash.
Still, Time Warner stock jumped $3.31 to a record $83.25 on the NYSE. Stocks often respond well to buyback announcements, as Wall Street figures that company managers are making a statement that their shares are undervalued.
So does the decline in total buyback announcements this year amount to another statement--that fewer managers believe there's significant value in their own stocks at current prices?
Arnold Kaufman, editor of Standard & Poor's Outlook investment newsletter in New York, notes that companies are facing other claims on their available cash, including higher wage rates (thanks to the tight labor market) and still-strong capital spending.
But perhaps the biggest reason why buybacks have faded somewhat is because merger activity is running at an unprecedented annual rate of $1.4 trillion.
"The increase in deal activity is so much greater" than total buyback activity, said Eric Miller, senior advisor at Donaldson, Lufkin & Jenrette Securities in San Francisco.
In other words, unlike MGM Grand, many American companies believe the smartest thing they can do today is buy up other businesses--with cash or with stock--rather than invest in their own shares or hand the money back to shareholders in another way, such as via higher dividends.
Whether that will in fact prove to be the smart decision in the long run is the $1.4-trillion (and growing) question.
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The number of U.S. companies announcing stock buybacks each year, and the dollar value of the programs at announcement:
Year No. of buybacks Value, in billions 1993 692 $41 1994 1,089 78 1995 1,169 101 1996 1,553 182 1997 1,362 190 1998 522 74
Source: Securities Data Co.