Share buybacks are returning

Pepsi leads the pack of companies planning to buy back shares. Would investors prefer dividends instead?

By Kim Peterson Mar 19, 2010 2:16PM
Smart ways to start investing © Creatas / PictureQuest Finally, companies are starting to return money to investors in the form of share buybacks, according to the Economist.

Case in point: Pepsi (PEP), which said this week it will buy back up to $15 billion in shares in the next three years, including $4.4 billion in 2010. That's the biggest repurchase since the financial crisis hit, the Economist reports. (Pepsi also increased its dividend by 7%).

So far this year, buybacks are in the range of $65 billion, compared to $137 billion for all of last year.

So are these buybacks a good thing?The Economist isn't sure, and suggests that some firms might be doing this because they just don't know what else to do with their money.

In practice, buybacks tend to occur when firms lack other sensible uses for their cash. So their reappearance may mean that firms are pessimistic about the broader economic outlook.

"Many firms have emerged from the crisis with record levels of cash on hand, yet see few organic growth opportunities," a member of Citigroup's corporate-advisory arm tells the magazine.

Of course, many companies are still holding on to their cash -- partly because they want to be prepared in case of another financial meltdown.

In the case of Apple (AAPL), that's making investors grumble. Apple's sitting on a massive mountain of cash -- $25 billion at last count -- and investors have been pressing for a dividend. But chief executive Steve Jobs will have none of it.

"We know if we need to acquire something -- a piece of the puzzle to make something big and bold -- we can write a check for it and not borrow a lot of money and put our whole company at risk," Jobs told shareholders, according to Bloomberg. "The cash in the bank gives us tremendous security and flexibility."

Apple hasn't paid a dividend since 1995, Bloomberg reports.

But there is enormous pressure on companies to return cash to shareholders -- especially if they aren't doing anything much with it. Are share buybacks or dividends better? That's an ongoing debate among investors.

Share buybacks can give executives a little juice during bonus time because they artificially raise the share price and earnings-per-share, the Economist reports.

In theory, bosses should embark on buy-backs when they feel their firm’s shares are undervalued. That was a much easier case to make a year ago, when few firms were buying, than it is today.

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