Where the Big Buybacks Are
Here are five companies with outsize share repurchase programs, including ExxonMobil, GE, Microsoft, and Goldman
Among the factors contributing to the rising stock market is an unprecedented level of buyback activity. Share buyback plans are a handy mechanism that companies use to put money to work and, in some cases, prop up lagging stocks. In the two years through December, 2006, Standard & Poor's 500 companies have gobbled up more than $800 billion of their own shares, including an estimated $110 billion in the quarter ending in March.
The biggest buyers are massive corporations which can't always find an immediate use for their billions. In some cases these buybacks can help boost the stock price. They can also artificially boost earnings per share, given the smaller number of shares available to the public. In other cases, the benefits are less clear.
This week's "Five for the Money" takes a look at some of the most significant buyback programs:
ExxonMobil
Over the past two years, ExxonMobil (XOM) has bought back $47.8 billion worth of its own stock, 75% more than Microsoft, which has the second-largest buyback program. The energy giant did this while trouncing the S&P 500 and turning in some of the most profitable quarters from any company ever.
So why does it need to snap up so much of itself? For ExxonMobil, this is a longstanding practice. It's a strong investment and the shares that have been bought back from public stockholders can be used for other purposes, including acquisitions. When Exxon merged with Mobil in 1999 in an all-stock deal, says Oppenheimer analyst Fadel Gheit, the company's investment in its own rising stock amounted to about a quarter of the price of $73.7 billion.
"ExxonMobil could go tomorrow and buy a company for $100 billion using its own stock," he says. Assuming the company continues its remarkable performance, investors should expect the buybacks to continue. "What other options do they have?" Gheit asks. "Are they going to give it back to Uncle Sam or fix New Orleans as [Senator] Chuck Schumer suggests?" Fat chance. (Gheit owns shares of ExxonMobil.)
Microsoft
After discounting investment in its renowned research and development operations, Microsoft (MSFT) generates staggering piles of cash through flagship software products like Windows and Office. But with the stock stuck for years in a narrow trading range, the company has embarked on an ambitious buyback program. In 2005 and 2006, the company repurchased $27.3 billion of its own stock.
Even with such a massive purchase, "it's kind of hard to move the needle even though the numbers are very large," says Morningstar (MORN) analyst Toan Tran, who says the 11-figure purchase has "made a dent" in their shares outstanding. Even by reducing supply, it's difficult to ascribe stock performance—especially for a company as far-reaching as Microsoft— solely to a buyback. However in the last year the stock has broken out and is now trading above $30, a rare occasion since early 2002.
Goldman Sachs
Compared with other major investment banks such as Merrill Lynch (MER) and Morgan Stanley (MS), Goldman (GS) is a newcomer to the public markets, having only had its initial public offering in 1999. As the company has delivered one of the highest returns on equity of any public company, Goldman's buybacks of almost $15 billion over the last two years, more than 10% of its market capitalization, have been a way to reward investors for the firm's success, says Atlantic Equities analyst Joseph Dickerson.
For Goldman, it is also a way to rein in some excess capital. "I think that they're at the ideal level now," Dickerson says. He expects that the "share repurchases that you'll see going forward will be a bit more opportunistic."
General Electric
As the industrial giant (GE) has seen its stock stall and because its sheer size limits its growth opportunities to a certain extent, the company has turned to huge repurchases of its own stock: upwards of $17 billion since 2005. The plan has not, however, lit a fire under shares, which have not shown much spark since 2003.
"Historically this has been a growth stock," says Jefferies analyst Robert Schenosky. "I think investors see the announced buybacks as the best use of cash." While he regards the buybacks as a smart move, they do not solve the company's more basic problem of finding reasonably priced growth opportunities. His remedy includes selling off slower businesses like lighting, appliances, and the TV network NBC. (GE is a Jefferies client.)
Time Warner
The media conglomerate has premier businesses in areas like magazines and movie studios. Like many others on this list, however, Time Warner (TWX) faces the enviable problem of what to do with too much money. With the future of publishing uncertain and with the company already owning assets like mega-studio Warner Brothers, there's little reason for it to expand in those areas, says Morningstar analyst Larry Witt. He also notes that the company already made a significant investment in cable by purchasing some of the assets of bankrupt cable operator Adelphia.
Given that the company's almost done with a $20 billion buyback, Witt doesn't expect the repurchases to continue. Nonetheless they may have contributed to the stock's climb from below $16 last August to above $21 at present.
Once the buyback is done, the company will still face the same happy dilemma of finding a place for its cash. Witt suggests that once the stock reaches his fair value estimate of $25, Time Warner should return the cash to shareholders in larger dividends.
Halperin is a reporter for BusinessWeek.com in New York.
