MSFT Microsoft Corporation

   (FROM THE WALL STREET JOURNAL 11/23/15) 
   By E.S. Browning 

Corporate stock buybacks are climbing toward a postfinancial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports.

Stock repurchases boost earnings per share, even if total earnings don't change, by reducing the number of shares. Analysts and investors typically track per-share earnings, not overall earnings.

Buybacks have drawn criticism from some fund managers including Larry Fink, chief executive of BlackRock Inc., which oversees $4.5 trillion in assets. He has said some companies invest too much in buybacks and too little in longer-term business growth. Repurchases also have become a political issue. Democratic presidential candidate Hillary Clinton has called for more-frequent and fuller disclosure of them by the companies involved, even as some activist investors push for more buybacks as a way of returning cash to investors.

In the year's first nine months, U.S. companies spent $516.72 billion buying their own shares, with third-quarter reports still not complete, according to Birinyi Associates. That is the highest amount for the first three quarters since the record year of 2007, the year before the financial crisis. It leaves this year on track for a post-2007 high if fourth-quarter buybacks hold up.

Buybacks can have a significant impact on earnings, as was illustrated this quarter by companies including Microsoft Corp., Wells Fargo & Co., Pfizer Inc. and Express Scripts Holding Co.

Microsoft turned a decline in total earnings into a per-share gain by repurchasing a little more than 3% of its shares in the past 12 months. Its total third-quarter earnings were down 1.3% from a year earlier, but per-share earnings rose 3.1%, according to FactSet.

For Wells Fargo, a 0.6% increase in total earnings became a 2.9% gain in earnings per share after buybacks. At Pfizer, a 2% overall earnings gain became a 5.3% per-share jump. Express Scripts, a large drug-benefits manager, turned a 2.8% overall gain into a 12.4% per-share increase.

Apple Inc. is by far the biggest buyback spender this year, with $30.22 billion, followed by Microsoft, Qualcomm Inc. and American International Group Inc.

This year isn't on pace to surpass 2007 in total buybacks. But Birinyi's data show that announcements of planned future buybacks are the highest for any year's first 10 months, more even than in 2007.

"If companies execute their plans, we are looking at a record amount being deployed over the next couple of years," said Birinyi analyst Robert Leiphart.

Some analysts have said for years that the buyback pace will slow, but there is little sign of that. Nike Inc. on Thursday announced plans for up to $12 billion in buybacks over the next four years, following an $8 billion program that ends next May.

With corporate cash levels near records and interest rates low, use of cash or debt to finance buybacks is becoming widespread.

"More than 20% of all companies in the S&P 500 reduced share count by at least 4%" over the 12 months through the third quarter, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. It marked the seventh quarter in a row that at least 20% of S&P 500 companies reported that kind of share reduction. A buyback of 4% or more can have a noticeable impact on earnings per share, Mr. Silverblatt said.

He calculates that about 12% of S&P 500 companies already have bought so many shares that, even if their total fourth-quarter earnings don't rise and they buy no more shares, their fourth-quarter earnings per share will be up at least 4%, due simply to reduced share count.

Last year, he said, he calculated that S&P 500 companies got a return of about 1.3% on cash they held, which put pressure on them to put the money to work.

Buybacks sometimes can push up a company's stock price simply by boosting demand. Most of the heaviest buyers of their own shares have seen their stock prices rise this year, with Apple up 8.1% and Microsoft up 17%. But Qualcomm is down 33% this year, Oracle Corp. has retreated 12.5% and biotechnology company AbbVie Inc. has fallen 6.6%.

Some critics have complained that buybacks also can represent a hidden cost of using stock awards or options as executive pay. When issuing stock to executives, companies typically buy back shares in the market to keep share count from rising. They don't typically announce the buybacks as a compensation cost, analysts say.

Some analysts would like companies to be more forthcoming. Currently, buybacks permit managers to receive "more of a company's cash flow than is reported as compensation on the income statement," said an October study by Research Affiliates, a research firm and investment-products designer in Newport Beach, Calif.

Mark Clements, one of the authors of the Research Affiliates report, noted that managers' pay also sometimes depends on gains in earnings per share, which can provide a further temptation to initiate buybacks.

More generally, critics have said that buybacks represent an artificial, short-term method of boosting profits. Some companies have made large buybacks in quarters when earnings were soft, leading to complaints that they were simply managing earnings.

In a letter this year to companies in which BlackRock invests, Mr. Fink, the CEO, wrote that "more and more corporate leaders" are taking "actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth."

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(END) Dow Jones Newswires

November 23, 2015 02:47 ET (07:47 GMT)

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