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.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.