DJIA 8466.45 +49.69 (+0.59%) S&P 500 1062.39 +5.97 (+0.57%) Nasdaq 1648.73 +27.78 (+1.71%) Value Line ndx 800.99 +14.79 (+1.88%) 30-Year Bond 108 4/32 +2/32 4.97% Yield
Computer networking company Shiva Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHVA)") else Response.Write("(Nasdaq: SHVA)") end if %> surged $1 1/4, or 29.4%, to $5 1/2 after announcing it has agreed to be acquired by the world's largest computer chipmaker Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> for $6 a share, a 41% premium to Shiva's closing price Friday of $4 1/4. The acquisition allows Intel to rapidly expand its networking product line with totally new products, including Shiva's remote access and virtual private networking (VPN) solutions for small- to medium-sized businesses. (VPN technology creates secure network connections between multiple local area networks (LANs) for the cost of a local Internet connection.) Bedford, Massachusetts-based Shiva will become a wholly owned Intel subsidiary and operate as part of its network products division. Having the (financial) power of Intel behind Shiva also will enable the company to better compete against rivals Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, 3Com Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>, and Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>. To listen to a replay of today's conference call, dial (800) 839-2434.
Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> gained $2 13/16 to $12 1/8 as a feeding frenzy ensued after a broad, noncommital comment by Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> CEO Michael Birck that indicated Tellabs hasn't ruled out making another bid to acquire the maker of equipment that boosts the capacity of telecommunications networks. Just over a month ago, the two called off their proposed merger amicably, with neither owing the other a break-up fee. The decision came after Ciena announced that previously expected contracts from AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and privately held Digital Teleport had fallen through, and that Q4 results would be "materially below" those of Q3, and 1999 year-on-year revenue and earnings growth would be "modest." But the "news" today was hardly new, considering Birck said during the conference call announcing the merger termination that he planned to "carry on conversations in the future" with Ciena and talk again "after the dust settles." Tellabs moved up $2 15/16 to $47 7/8.
QUICK TAKES: Computer networking company Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> rose $15/16 to $47 7/8 in advance of reporting Q3 EPS of $0.32, compared with last year's $0.20 and analysts' expectations of $0.31... Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>, the world's largest aircraft maker gained $2 3/16 to $34 7/16 after last Friday winning contracts from the U.S. Air Force valued at $1.88 billion... Glad bags and STP auto products maker First Brands Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FBR)") else Response.Write("(NYSE: FBR)") end if %> soared $12 3/8 to $36 after agreeing to be acquired by laundry bleach maker Clorox Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLX)") else Response.Write("(NYSE: CLX)") end if %> for about $2 billion in stock and assumed debt. Clorox picked up $4 1/4 to $104... Several retailers were marked up today after Goldman Sachs raised them to "recommended list" from "market outperform." Costco Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> jumped $2 7/8 to $54 13/16, Wal-Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> gained $2 1/8 to $68 3/4, and Target Stores parent Dayton Hudson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> added $1 5/16 to $44 3/16.
Internet browser and enterprise software company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> moved up $3 1/2 to $23 3/4 while Web streaming media technology company RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> jumped $2 1/2 to $37 3/8 after announcing an agreement to bundle RealNetworks RealPlayer 5.0 with Netscape Communicator 4.5 and on Netscape Netcenter starting this week... Bus company Greyhound Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BUS)") else Response.Write("(AMEX: BUS)") end if %> ran ahead $13/16 to $5 11/16 after announcing it has agreed to be acquired by ambulance, school bus, and municipal transit services company Laidlaw Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LDW)") else Response.Write("(NYSE: LDW)") end if %> for $6.50 per share, up to $4.00 of which can be paid for with Laidlaw shares. Laidlaw already owns Greyhound Lines of Canada.
PathoGenesis Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PGNS)") else Response.Write("(Nasdaq: PGNS)") end if %> tacked on $2 1/2 to $37 1/8 after Prudential Securities reiterated a "strong buy" rating on the drugmaker and set a 12-month price target of $56... Generic drug maker Schein Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHP)") else Response.Write("(NYSE: SHP)") end if %> recovered $1 11/16 to $10 7/8 after Friday announcing it has reached a consent agreement with the FDA that will allow it to resume operations at its Phoenix-based Steris Laboratories subsidiary... Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> regained $3 3/8 to $54 3/4 after calling rumors that the investment bank was in dire financial straits "absolutely false" and saying that the company was in "sound financial condition." The company's shares fell $6 to $51 3/8 Friday on the rumors.
Internet auction company eBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> was bid up $9 3/8 to $45 3/8 as BancBoston Robertson Stephens rated it a "buy" in new coverage, saying the company has no inventory risk and the U.S. market for eBay could be as much as $100 billion... Oil equipment and services company Bayard Drilling Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDI)") else Response.Write("(NYSE: BDI)") end if %> jumped $1 to $5 15/16 after agreeing to be acquired by Nabors Industries Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NBR)") else Response.Write("(NYSE: NBR)") end if %> for about $225.5 million in stock, cash, and assumed debt... Information technology company BRC Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRCP)") else Response.Write("(Nasdaq: BRCP)") end if %> added $2 3/32 to $18 11/32 after announcing it will be acquired by Affiliated Computer Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFA)") else Response.Write("(NYSE: AFA)") end if %> for around $261 million, or $19 a share. Affiliated Computer gained $2 1/16 to $30 15/16.
Inktomi Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %> jumped $6 3/4 to $84 as its search engine is being incorporated as part of GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %>, which sets up host groups on websites. (Check our a recent StockTalk interview with the CEO of Inktomi)... Fort James Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FJ)") else Response.Write("(NYSE: FJ)") end if %> was lifted $2 1/8 to $36 5/8 and Weyerhaeuser Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WY)") else Response.Write("(NYSE: WY)") end if %> added $1 7/16 to $49 3/8 after Barron's reported that shares of the paper companies could rise as cyclical stocks come back in style with investors... Barrett Resources Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRR)") else Response.Write("(NYSE: BRR)") end if %> climbed $3 1/2 to $23 3/8 after Prudential Securities raised its rating on the energy company to "strong buy" from "hold"... Natural gas utility Colonial Gas Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLG)") else Response.Write("(NYSE: CLG)") end if %> was cooking today, rising $4 3/16 to $33 3/4 after announcing it will be acquired by Eastern Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EFU)") else Response.Write("(NYSE: EFU)") end if %> for $37.50 per share in stock and cash. That represents a 26.8% premium to Colonial Gas' closing price Friday of $29 9/16. Eastern slipped $5/8 to $42 3/4.
Photoelectron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PECX)") else Response.Write("(Nasdaq: PECX)") end if %> surged $2 3/4, or 88%, to $5 7/8 after announcing it has received the first order for its Photon Radiosurgery System (PRS), a proprietary X-ray delivery system for tumor therapy, from New York Medical College's University Hospital in Bronx, New York... Assisted living company Karrington Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KARR)") else Response.Write("(Nasdaq: KARR)") end if %> charged up $2 3/16 to $11 1/4 after agreeing to be acquired by Sunrise Assisted Living <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNRZ)") else Response.Write("(Nasdaq: SNRZ)") end if %> for $191 million in stock and debt... Medical alert company Lifeline Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LIFE)") else Response.Write("(Nasdaq: LIFE)") end if %> rose $3 1/8 to $25 3/4 after agreeing to be acquired by Western Resources Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WR)") else Response.Write("(NYSE: WR)") end if %> Protection One <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALRM)") else Response.Write("(Nasdaq: ALRM)") end if %> subsidiary for $179 million in cash and stock.
Earnings Movers
Advanced Technical Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATPX)") else Response.Write("(Nasdaq: ATPX)") end if %> up $1 5/8 to $8 1/4; Q3 EPS: $0.35 vs. $0.24 last year; Estimate: $0.35 (one analyst)
Boston Beer Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAM)") else Response.Write("(NYSE: SAM)") end if %> up $3/4 to $8 1/8; Q3 EPS: $0.13 vs. $0.16 last year; Estimate: $0.10
J.P. Morgan & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> up $3 3/8 to $92 7/8; Q3 EPS: $0.58 (before one-time items) vs. $1.96 last year; Estimate: $0.81.
Robert Half International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHI)") else Response.Write("(NYSE: RHI)") end if %> up $2 1/16 to $41; Q3 EPS: $0.37 vs. $0.26 last year; Estimate: $0.35
Tandy Brands Accessories <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TBAC)") else Response.Write("(Nasdaq: TBAC)") end if %> up $1 3/8 to $13; fiscal Q1 EPS: $0.41 vs. $0.35 last year; Estimate: $0.40 (one analyst)
Vulcan Materials Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VMC)") else Response.Write("(NYSE: VMC)") end if %> up $5 1/8 to $109 1/4; Q3 EPS: $2.64 vs. $2.14 last year; Estimate: $2.25
Drug distributor McKesson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCK)") else Response.Write("(NYSE: MCK)") end if %> fell $12 11/16 to $76 today after announcing an agreement to merge with healthcare software and services company HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %>. In July, the two companies were set to get together but called off the deal as word leaked out and sent HBO's shares down 11%. Same story today -- HBO's shares finished the day down $4 3/8, or 14.8%, to $25 3/16. Once again, the market is greeting the transaction frostily, which isn't terribly surprising given that the benefits of the deal to HBO shareholders are somewhat muddled by the prospect of their company's excellent information technology-fueled economics being eroded by McKesson's less desirable economics as a distributor. For two Foolish takes on the deal, see today's Lunchtime News and Breakfast With the Fool.
Grocery store chain Kroger Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %> checked out $3 5/16 to $45 7/16 after agreeing to buy fellow grocer Fred Meyer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %> in a deal valued at $13 billion in stock and assumed debt. Fred Meyer shareholders will end up owning 38% of the new company, which will become the nation's largest grocery store chain with about 2,200 stores in 31 states. Fred Meyer sank $4 13/16 to $44 3/16. As described by the Motley Fool's Alex Schay not long ago, grocers prefer to boost unit growth by acquiring competitors instead of erecting stores in new markets. However, with Albertson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABS)") else Response.Write("(NYSE: ABS)") end if %> gobbling up American Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASC)") else Response.Write("(NYSE: ASC)") end if %> and Safeway's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> recent decision to dine on Dominick's Supermarkets <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFF)") else Response.Write("(NYSE: DFF)") end if %>, the shopping list of large takeover targets is quickly shrinking for the nation's big grocers.
Anika Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANIK)") else Response.Write("(Nasdaq: ANIK)") end if %> tumbled $7 19/32 to $4 13/32 after revealing it had received a letter from the FDA asking for more clinical data on the effectiveness of Orthovisc, a treatment for osteoarthritis of the knee, before it would grant pre-market approval for the product. Anika CEO J. Melville Engle said while the FDA's decision would have an unspecified impact on the firm's financial results, he believed the combination of international Orthovisc revenues with other sources of income would be enough to fund operations while a new clinical trial is held. Orthovisc is currently sold in Canada, Spain, and Turkey and has received the CE Mark for sale in the European Union. However, investors had hoped it would be approved in the U.S. soon and lessen Anika's dependency on its Amvisc ophthalmic viscoelasticity products, which accounted for 84% of the firm's fiscal 1997 revenues.
QUICK CUTS: Life sciences company Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> sank $3 to $36 1/2 after saying fiscal 1999 will be a "transition year," which will include higher development expenses and possible asset divestments. However, the company expects its net income to increase "substantially" in fiscal 2000 and beyond... Automotive components supplier Lear Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEA)") else Response.Write("(NYSE: LEA)") end if %> stalled $8 3/8 to $32 1/4 after reporting fiscal Q3 EPS of $0.32 versus $0.52 a year ago, which was in line with the Street's mean estimate. The company said it will take a $125 million charge in Q4 to consolidate and reconfigure its international operations... Vitamin retailer Nature's Bounty <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBTY)") else Response.Write("(Nasdaq: NBTY)") end if %> swallowed a $5/8 loss to $6 3/8 after Raymond James downgraded the company to "accumulate" from "buy."
Software giant Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> slipped $2 1/8 to $102 15/16 as the federal government's antitrust suit against the company began today with opening arguments from the government... Hotel operator and franchisor Prime Hospitality Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDQ)") else Response.Write("(NYSE: PDQ)") end if %> slid $13/16 to $5 7/16 after announcing that president and COO John Elwood resigned in order to allow newly appointed chairman and CEO A.F. Petrocelli "the greatest degree of flexibility in structuring his management team organization"... Catalog apparel and jewelry retailer Coldwater Creek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CWTR)") else Response.Write("(Nasdaq: CWTR)") end if %> was doused with a $1 7/16 loss to $13 3/16 following a Piper Jaffray downgrade to "neutral" from "buy."
Medical research and diagnostic testing instruments provider Beckman Coulter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEC)") else Response.Write("(NYSE: BEC)") end if %> declined $1 to $52 3/4 after reporting fiscal Q3 EPS of $0.47 (including merger-related charges), which was in line with the Street's mean estimate. The company said it will cut an unspecified number of jobs at its manufacturing plants in Puerto Rico and San Diego... Oil and gas exploration products and services firm Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> was drilled $2 1/4 to $29 3/4 after reporting fiscal Q3 EPS of $0.50, missing the Zacks mean estimate of $0.56... Land and offshore oil and gas drilling rig operator Nabors Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NBR)") else Response.Write("(AMEX: NBR)") end if %> sank $1 3/16 to $16 7/16 after announcing its intention to buy Bayard Drilling Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BDI)") else Response.Write("(AMEX: BDI)") end if %> for approximately $220 million in stock, cash, and assumed debt. Bayard, which owns and operates 87 drilling rigs in the U.S., was up $1 to $5 15/16.
Shipping and logistics services provider FDX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> dropped $1 1/2 to $53 3/4 after the union representing 3,200 of the company's pilots voted over the weekend to request authorization to call a strike if ongoing labor talks with the company fail to yield a suitable contact... Clinical call center management and information services provider Access Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> lost $2 7/8 to $34 after its merger-mate HBO & Co. agreed to be acquired by McKesson Corp., casting some doubt over how Access will be integrated into the new company... Flexible polyurethane and advanced polymer products manufacturer Foamex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FMXI)") else Response.Write("(Nasdaq: FMXI)") end if %> slid $9/16 to $10 3/16 after its principal shareholder, Trace International Holdings, called off its $18.75 per share cash buyout bid of the company due to financing problems.
Rental furniture company Cort Business Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBZ)") else Response.Write("(NYSE: CBZ)") end if %> dropped another $1 1/8 to $15 after falling 23% Friday as the company said its near-term revenue and profit growth rates will be hindered by economic uncertainties and increased competitive pressures on some of its markets... Voice, video and data systems provider ADC Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADCT)") else Response.Write("(Nasdaq: ADCT)") end if %> lost $11/16 to $21 11/16 after reporting plans to buy privately held Hadax Electronics, which makes remote test and access systems, for $25 million... Data transfer systems provider Adaptec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %>, currently sitting well below its 52-week high of $52 1/2, slid $11/16 to $10 11/16 despite announcing a plan to buy back up to $200 million of its common stock.
FOOL
ON THE HILL
An Investment Opinion
by
Paul Larson
An Introduction to Share Buybacks
Unlike years past when paying out dividends was the rave on Wall Street, company share repurchases are en vogue today as a way to compensate shareholders with a company's excess cash. As we will look at in a moment, share repurchases enhance shareholder value in many ways.
One of the reasons companies are opting for share repurchases over dividends is that shareholders often prefer capital gains over the current income that comes form dividends. In addition, dividends are double taxed since all profits a company earns are taxed at the corporate level. If a company wishes to pay out some of its profits in the form of a dividend, the shareholders also have an income tax liability. In this type of environment, it makes sense that dividend yields of stocks are near all-time lows at the same time that share repurchase activity has been extremely brisk.
Let's now quickly take a look at why a company buying back its shares with excess cash tends to increase value for shareholders. Share repurchases by their very nature decrease the number of shares outstanding. Having fewer shares outstanding not only increases the relative percentage ownership of the remaining shareholders, but also the percentage claim on the company's profits. Said another way, buying back shares increases the earnings per share (EPS) assuming that net income is at least steady. If a company can manage to increase earnings at the same time it is retiring shares, the growth in EPS is compounded.
If a stock's price is its market-assigned price-to-earnings (P/E) ratio multiplied by the earnings per share, it only makes sense that an increase in the EPS would translate to an increased price given a steady P/E multiple. Mathematically, it looks like this:
Stock Price = EPS * P/E Ratio
Using the above equation helps to explain a stock's valuation when thinking about many other valuation topics, not just share buybacks. In any case, if you increase the right side of the equation, the left side (the stock price) will also appreciate.
Another way to look at why share buybacks tend to increase shareholder value is by thinking about the equilibrium between supply and demand for any given stock. If demand remains constant and the supply (number of shares outstanding) decreases, prices in a free market tend to rise. This is nothing more than simple economics.
Reducing excess cash can also have a dramatic affect on some important efficiency metrics that many investors look at. Still assuming that a company's net income remains constant over time, share buybacks also tend to increase both a company's Return on Assets (ROA) and Return on Equity (ROE). Let's again look at some simple math to see why this is true.
Return on Assets = Net Income / Average Assets
Since cash is certainly part of any company's assets, it again makes sense that reducing assets by spending money to buy back shares would increase the ROA, all else being constant. Substituting "Equity" for "Assets" in the above equation also shows why share buybacks tend to increase ROE with steady profits.
Yet another way to think about why having too much cash might drag down returns is to just look at what cash is yielding these days. Having great amounts of cash on the balance sheet yielding after-tax returns of 3% is going to bring down the weighted average returns on assets and equity. Of course, having a lot of cash on the balance sheet decreases risk, but its role in hampering returns should also be clear.
Share repurchases, unfortunately, are not always successful. One of the worst times a company can buy back shares is when the company's core business is taking a hit. When investors start selling a stock down because of a deterioration in the fundamental health of a company, many times executives (who more times than not own stock options) are enticed by the temporary positive effects that share buybacks may yield. But if the company's future fortunes are truly coming into question, buying back shares often just wastes valuable cash that may be needed to shore up the business down the road. In other words, share buybacks done poorly can exacerbate a bad situation.
Witness Vivus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VVUS)") else Response.Write("(Nasdaq: VVUS)") end if %> and Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>. They represent recent cases of companies that have faced crumbling financials yet continued their share repurchases. The result has been company cash wasted buying back shares at significantly higher levels than where the stock is currently trading. Looking at which companies are buying back shares can often reveal good buy candidates, but the fundamental business strength should be the primary concern.
Another time investors should look on share repurchases with an inquisitive eye is when a company has a high amount of debt. In this case, buying shares back represents nothing more than an increase in a company's leverage, not really a return of excess cash. Almost by definition a leveraged company's cash is not excess. Two companies that found out the hard way that maybe paying down debt would have brought better results than buying back shares include casino operators Circus Circus <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> and Trump <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %>. Both companies have kissed some liquidity good-bye at higher stock prices while doing nothing more than increasing the net interest expense on their income statements.
Nevertheless, the list of companies that have successfully bought back shares reads like a who's who of the blue-chip universe, including companies such as Coke <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>. While there are always some exceptions to the rule, share buybacks tend to enhance shareholder value when done properly. Investors will serve themselves well if they know why repurchases work and can spot the difference between what is a bona fide return of capital to them and what is merely a company playing games and leveraging up.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
WE
DELIVER - Get The Evening News delivered
to your e-mailbox every evening!
See something moving a stock that we didn't cover?
E-mail the
Fool
News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
|
Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |