A stock buy back is often viewed as a positive sign for shareholders, but sometimes a share repurchase plan can be a red flag.
Qualcomm Inc. became the latest company this year to launch or expand a stock buy back with yesterday’s announcement that it would boost dividends and launch a $4 billion repurchase program to replace an existing $3 billion plan.
“Our business model continues to drive strong cash flows, enabling investments in our key business initiatives while we continue to return capital to stockholders,” said Dr. Paul E. Jacobs, chairman and CEO of Qualcomm, the world’s largest provider of wireless chipset and software technologies. The San Diego-based company was started by seven entrepreneurs in 1985 and now has a market capitalization of $104 billion.
“Since these programs began in 2003, we have returned $16.8 billion to stockholders through a combination of stock repurchases and cash dividends” said Jacobs, who with yesterday’s announcement made Qualcomm the 78th company to launch or expand a stock buy back program this year, according to data provided by The Online Investor.
The list includes less well-known companies, such as Lattice Semiconductor and AutoNavi, and household names, such as Macy’s, Target, Time Warner Cable, AT&T and the United Parcel Service. Why would these companies initiate a stock buy back?
Many companies, like Qualcomm, tout share repurchase programs as yet another way – in addition to dividends and share price appreciation - to distribute wealth to shareholders. A stock buy back utilizes a company’s cash reserves and is generally seen as a positive sign on Wall Street.
Stock prices typically bounce up when a company announces plans to invest in itself, absorbing the repurchased shares and, as a result, reducing the overall number of shares. The outcome can be an improved price-to-earnings or P/E ratio, a common measure of a company’s value, and an increased ownership stake for individual investors.
A stock buy back can also signal a problem in the underlying business, warned Fitch Ratings in a November press release issued in response to “decidedly more aggressive” share repurchase programs by U.S. companies.
“Not all share repurchase plans are painted with the same brush,” said Fitch in a prepared statement. The company, along with Moody’s and Standard & Poor’s, make up the three key credit rating agencies operating globally. “A distinction remains between returning excess cash to shareholders and financial engineering.”
Companies in the retail sector – Radio Shack and Best Buy in particular – are at a high risk of over leveraging to complete large share repurchases, said the ratings agency.
“Whether due to a slow-growth environment, competitive pressures, product-cycle issues or simply weak operating executive, lagging return-on-equity performance is often a catalyst for more aggressive financial engineering,” said Fitch, warning that a stock buy back is not always a positive sign for shareholders.