Market Plunge Fans Stock-Buyback Plans
Plunging share prices are prompting more companies to announce plans to buy back their own stock, signaling that executives think their companies are among the best investment opportunities.
Nine companies announced a total of $1.8 billion in buybacks last week, according to Trim Tabs Financial Services, which tracks cash flows in the equity market.
On Monday, Viacom Inc. joined the crowd, saying it will buy back $1.75 billion of its stock.
After the market closed Monday, Boeing Co. announced it would spend $4.5 billion, based on the day’s closing price, to buy back up to 15% of its outstanding shares.
Boeing stock has fallen almost 45% since hitting a high for the year of $56.06 on April 6.
It has dropped 22% in the last six trading sessions and closed down $3 at $30.94 on Monday--its lowest level in three years.
Viacom, the third-largest entertainment company in the U.S., had fallen 22% from its July 30 high through Friday. After news of the buyback, its Class A shares jumped $1.38 on Monday to $55.50, before falling with the rest of the market to close at $49.25.
Buybacks are usually announced by companies that have ample profits and don’t want to spend the cash on debt reduction or making acquisitions.
Buybacks reduce the number of shares outstanding, which increases earnings per share and can result in a higher share price over time.
Reliance Steel & Aluminum Co. gained $1.75 to close at $30.50 on Monday after it announced it would buy back 2.5 million, or 13%, of its outstanding shares.
Viacom said it would fund its buyback from working capital. The New York-based company had $336 million in cash and equivalents at the end of the second quarter, according to a recent filing with the Securities and Exchange Commission.
“After the crash in ’87 we had a lot of stock repurchases,” said Peter Coolidge, managing director of equity trading at Brean Murray & Co. “It bolsters confidence that [executives in] corporate America think their stocks are undervalued.”
“Anything that adds buyers to the market is good,” he said. “Corporate repurchase programs give the market a shot in the arm.”
Commodity producers, which have seen their stocks slump along with metal and oil prices, are also announcing share-purchase programs in an effort to bid stock prices higher.
Valero Energy Corp., the fourth-largest independent oil refiner in the U.S., said Friday that it would buy back as much as $100 million of its common stock to take advantage of low share prices.
The buyback, its first since 1992, would cover about 9% of its 56 million outstanding shares at current prices.
Valero’s stock fell 69 cents to $17.88. It has fallen 49% since its high of $35 on June 5.
Freeport-McMoRan Copper & Gold Inc. said last week that it would buy back as much as 11.5% of its shares, which are trading at record lows as the miner faces weak global metals markets.
Mining companies “have seen their stock prices quite depressed, and I will not be surprised to see more announcements of share repurchases,” said Vahid Fahti, metals and mining analyst at ABN Amro Inc. in Chicago.
Still, analysts warn that not every company may follow through on their proposed buybacks, and some companies have other motives for repurchasing stock as share prices decline.
Such moves can benefit shareholders by halting a stock’s decline and chasing away--at least temporarily--short sellers, who profit when stocks fall, said Sean Daly, president of New York-based Tower Hill.
* MORE ON VIACOM: D12
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Putting Stock in Themselves
With share prices on the decline, several companies have announced stock-buyback plans in recent days. Investors should note that companies don’t always follow through with their buyback plans.
*--*
Company Monday close Change Est. P/E* Viacom Class A $49.25 -$4.63 116.7 Boeing $30.94 -$3.00 29.6 Reliance Steel $30.50 +$1.75 12.5 Valero Energy $17.88 -$0.69 8.4 Freeport C&G; $11.63 -$0.25 15.6
*--*
*Estimated price-to-earnings ratio based on analysts’ earnings estimates for the next four quarters
Source: Bloomberg News
