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Investors question wisdom of using capital to manipulate stock price instead of to produce goods and services


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For other reports of the long term investor interests addressed in the article below, including cited examples and research, see the "Stock Buyback Policy" section of the reference page for the Forum's 2014 Walgreen project.


Source: The Wall Street Journal | CFO Journal, September 22, 2015 article



CFO Journal

12:11 pm ET
Sep 22, 2015


Buybacks Take Tumble Amid Wary Debt Investors


By Maxwell Murphy

US dollar bill. Big companies slashed spending on share repurchases in recent months.

—Getty Images

As debt-fueled share repurchases increasingly worry bond investors, large companies sharply curtailed overall buybacks in recent months.

S&P 500 companies spent $134.4 billion on repurchases during the three months ending July 31,  according to FactSet.  That’s off nearly 7% sequentially from the April period.

FactSet said companies bought back 2.8% of its aggregate shares outstanding during the year ended in July, which was the smallest showing for the index in more than four years. Even with the decrease, companies still spent more 8% more on buybacks than they generated in in free cash flow, or operating cash flow less capital expenditures.

Companies hadn’t outspent their quarterly free cash flow on buybacks since the October period in 2009.

Activist investors are pushing companies to return more cash to shareholders, even at the expense of capital expenditures. In an era of tepid global growth, buybacks can also goose per-share earnings at a better clip than underlying net income increases. For executives whose bonuses are tied to EPS growth, this can mean bigger paydays.

Last year, 22 companies in the index posted higher EPS solely due to reducing their share count.

Historically low interest rates also mean companies with generous dividends can issue debt with coupons lower than their dividend yields, meaning a swift buyback will more than pay for itself.

But bond investors remain wary of using debt proceeds for buybacks rather than investments in the business. “In terms of an orange-level alert, or a red-level alert, I think we’re at an orange level,” Putri Pascualy, a portfolio manager at Pacific Alternative Asset Management Co., said in June.


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