THE WALL STREET
Juice Per-Share Profit, Pad Executive Pay
Running at Fastest Clip Since Recession, Likely to Accelerate
Oct. 27, 2014 7:42
Buying earnings growth cuts both ways.
In the most recent quarter, one in four companies in
the S&P 500 index is expected to have juiced its earnings per share by
4% or more by snapping up its own stock, according to S&P Dow Jones
Indices. That is up from one in five at the beginning of the year.
Corporations have long bought their own shares as a way
of returning excess cash to shareholders. Reducing the number of
shares outstanding gives the remaining investors a larger stake in the
company. Buybacks also are often a sign of a company’s confidence in
The other side of the blade: Some shareholders and
analysts are questioning why companies aren’t instead plowing more
money back into their business, and they say that buybacks may serve
the interests of top management more than those of average
“Executives are compensated [based] on EPS,” said
Warren Chiang, a managing director at investment firm Mellon Capital
Management Corp. EPS growth, he added, is “the primary reason they do
After a dip in the second quarter, companies have been
buying back their shares at the quickest clip since the recession, and
the pace is expected to accelerate through year-end.
Among those that have invested most aggressively in
their own stock are
Illinois Tool Works Inc., and
FedEx Corp. , which all have
reported year-to-year EPS growth in the latest quarter at least 13
percentage points higher than their gains in overall profit.
Ingersoll-Rand and Illinois Tool spokeswomen said
one-time events were partially responsible for the discrepancy between
net income and EPS growth. FedEx didn’t provide comment.
While the economy has crawled back to life, many
businesses remain reluctant to buy new equipment, build factories or
hire workers. They blame the uneven recovery that has left many
Americans behind and foreign markets that are stumbling.
Repurchases, meanwhile, can boost a company’s curb
appeal. Illinois Tool Works used buybacks to post an EPS surge of 33%,
nearly twice the latest quarter’s bottom-line profit growth.
Bed Bath & Beyond Inc. ’s stock
purchases turned a 10% drop from a year earlier in overall profit into
a penny improvement in EPS. The housewares retailer didn’t provide
Flouting Wall Street’s conventional wisdom of “buy low,
sell high,” companies tend to vacuum up their stock as prices rise,
and dial back purchases when prices swoon, said Gregory Milano, chief
executive of business consulting firm Fortuna Advisors LLC. Plus, he
said, companies that avoid buybacks usually outperform those that
embrace them over the long term.
“It’s kind of like a kid in school. A lot of kids are
motivated by getting the best grades they can; other kids are focused
on learning as much as they can,” he said. While the child with better
marks might have a leg up entering the workforce, “the kid who
understands it better has a better career.”
Of course, there are times when companies are awash in
Home Depot Inc. has bought back
almost $50 billion of its shares since 2002. And CFO Carol Tomé says
she is content to pursue this strategy as long as the home-improvement
retailer’s stock price is below what she believes is its intrinsic
“If you’re cash rich, and you have no better place to
put it,” she said. “We’re such a cash cow. The last thing we’re going
to do is sit on cash. That is value-destroying to our shareholders.”
In addition, a well-executed buyback can charm money
Northrop Grumman Corp. has “done
an A-plus job in our mind,” because it has been buying shares at an
attractive valuation, and
Lockheed Martin Corp. has “done a
similarly good job,” said Matt Lamphier, a portfolio manager at First
Eagle Investment Management, a major shareholder in both defense
Finance chiefs bristle at the idea that buybacks are
just a mechanism to burnish EPS numbers or pad their bonuses.
“If you’re doing the top-line growth, buying back stock
is just a means of returning capital to shareholders,” said John
Geller Jr. , CFO of
Marriott Vacations Worldwide
Corp. , which announced this month it would buy back 10% of its
shares. Plus, he added, “most investors are fairly sophisticated,” and
can tell the difference between real and fabricated growth.
Still, investors should expect a year-end spending
spree. While about 8% of a year’s buybacks historically take place
October, the peak is in November, with 14% of repurchases, and another
10% come in December, according to David Kostin, senior U.S. equity
strategist at Goldman Sachs Group Inc.
Late last year,
Stanley Black & Decker Inc. said
it would buy back as much as $1 billion of its stock, or 7% of its
current market value, by the end of 2015. But, CFO Donald Allan Jr.
acknowledges that the tonic effects of such deals are temporary.
Buybacks alone “might help your stock price performance
and your company’s performance for a two- to three-year period,” he
said, “but it’s not going to help the performance of the company over
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