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8B – Daily News – Monday, April 4, 2011 Why a jump in share buybacks is not a bullish sign NEW YORK (AP) — Companies are gobbling up their own shares this year. Should you join in the buy- ing spree? For stock investors, there is seemingly no better bullish sign. After all, the corporate executives behind the decision to buy presum- ably have a good idea whether their company will prosper. If they’re buying, the thinking goes, the shares must be going up. Except they often do not — and may not now. ‘‘Companies have been pretty poor at timing pur- chases,’’ says Robert Leiphart of Birinyi Associ- ates, a research firm that has studied buybacks. Gre- gory Milano, the CEO of consultancy Fortuna Advi- sors, is more blunt: ‘‘We’re in the middle of a buyback bubble.’’ Since the start of the year, U.S. companies have announced plans to buy back $150 billion of their own stock, a 38 percent jump from last year, according to Birinyi. The buying fever has swept across industries. Tech giant Intel Corp. plans to buy $10 billion more of its stock. Drug-maker Pfizer Inc. says it will buy $5 bil- lion this year. Home Depot Inc. says it will buy $1 bil- lion worth now, more than a quarter of what it generated in profits last year. The last time companies were so hot on their own stock was 2007, which points to the problem: That was right before the market began a long, painful drop Local Business Folks: The Daily News’ Sue Hubbard is RETIRING! Come join us at the offices of the newspaper to wish Sue Hubbard a happy retirement. Sue has served the advertising needs of local businesses at the Daily News for 10 years, and for a local shopper before she joined the team at the newspaper. 4:30-6:00 PM Thursday, April 7 The Daily News 545 Diamond Ave. Snacks and Refreshments will be served Hope to see you here! Contact your Daily News Advertising Rep TODAY! RED BLUFF to a 12-year low. Contrary to popular belief, compa- nies often buy high, not low — and ordinary investors are the worse off for it. In a study last year, Fortuna’s Milano compared stock returns of 1,000 large non- financial companies broken down by buyback activity. Shares of the 250 compa- nies that spent the most on buybacks lost 3 percent over five years through 2008. By contrast, shares of the 250 companies that spent the least on buybacks gained 28 percent. Milano says many com- panies that don’t buy stock use their money instead to build factories or buy equipment or invest in R&D, and that often leads to more profits and a higher stock price. Unfortunately, compa- nies not only tend to buy too much stock at the wrong time, they tend to buy too little when the time is right. Two months after stocks hit their peak in 2007, the economy fell into its deep- est recession since the 1930s. Stocks eventually hit a low in March 2009. It was a perfect opportunity for companies to make up for their earlier ill-timed purchases with some well- timed ones. They got tight- fisted instead. Birinyi’s Leiphart notes that many companies were under- standably scared that a depression loomed, and so some pullback in repur- chases was prudent. In the event, buybacks fell in 2009 to a fifth of what they were at the bull market high. Home Depot followed the general pattern. After pouring $10.8 billion into its stock in 2007, it bought just $213 million in 2009 — or 2 percent as much, according to Birinyi. Its stock hit a low of $18 that year, half its price two years earlier. Now its stock is rising and it’s buying again along with plenty of others. But is repurchasing stock wise now that prices nearly dou- bled in two years? For its part, Home Depot says it is ‘‘disciplined and balanced’’ in allocating capital. It also notes its buybacks over the past eight years have aver- aged $36 a share, below the closing price Friday of $37.56. ROUND-UP Red Bluff Weekend - Events Itinerary and Guide - 7,000 copies Published as an insert to The Daily News Wednesday, April 13 2,000 additional local distribution through Sunday April 17: Restaurants ★ Hotels ★ Weekend Event Sites Participating Local Businesses ★ Fairgrounds This magazine-size special section will reach and excite those folks already planning to attend Red Bluff’s “crown jewel” event – and the final Community events leading up to it; the mixer, the parade and more. Distribution will be through the Daily News, with additional freestanding distribution to reach non-subscribers and visitors. Here’s a low-cost, last minute option to “brand” your business with the Round-Up, and let folks from out of town know that you’re here – particularly valuable for restaurants, hotels and western-oriented retail businesses. Deadline for Space Reservations: Monday, April 4 at 5 PM ! 527-2151 D NEWSAILY TEHAMACOUNTY The appeal of buybacks is that they make earnings per share rise. Consider a company that generates $100 in profit a year and has issued 100 shares. The owner of a single share the- oretically has claim to $1 of those profits ($100 divided by 100 shares). If the com- pany buys half those 100 shares back, that investor’s cut of profits doubles to $2 even if overall profits don’t change ($100 divided by 50 shares). Another reason to repurchase shares is to compensate for stock options used to pay employees. Because they increase the share count, companies issuing options must repurchase just to keep per share profits from falling. But even if companies get the timing right, buy- backs can hurt investors. That’s because it takes money away from better uses. ‘‘At business school, you learn about the pecking order for cash: First it should go into R&D and advertising and buying plants and equipment,’’ Milano says. ‘‘Then maybe an acquisition or paying down debt. And only if you have any left over do you buy your own stock.’’ The problem is, Corpo- rate America often gets the order reversed. In another Milano study last year, he compared money that com- panies spent on repurchas- es to what they spent build- ing factories and buying equipment to make their businesses better. At the height of buyback lunacy in 2007, companies spent 12 percent more on repur- chases than on such invest- ments. Last year, repur- chases fell to a more healthy 35 percent less than investments. DEADLINE TODAY! HURRY!