Type “buybacks” into the search engine on Amazon.com, and the first item that pops up is a 2001 Harvard Business Review report called “Is a Share Buyback Right for Your Company?”
Apparently, it was the right move for Amazon.com. On Monday, the company’s board authorized the repurchase of $500 million of common stock over the next two years.
The buyback program allows the company to “opportunistically repurchase its shares,” especially if officials believe the shares are undervalued, notes a regulatory filing announcing the decision. Amazon.com officials could not be reached for further comment at press time.
Amazon.com is just latest in a long line of public companies to announce buybacks. Last week, Standard & Poor’s issued a report saying that S&P 500 companies repurchased a record $116 billion in stock during the second quarter, up 43 percent from buybacks in the second quarter of 2005, and 175 percent higher than the second quarter of 2004. Furthermore, in August, companies such as 3M, Ralph Lauren, Safeco, CA, and tiny auto parts maker Gentex announced share repurchase programs.
And why not? Corporate bank accounts are swelling with cash, and companies are either buying back stock or handing out dividends to share the wealth with investors. To be sure, buybacks are more popular currently, says a recent article in CFO magazine. For one thing, they are tax-deferred, while dividends are still subject to a 15 percent tax.
Buybacks are also one-off: repurchasing a block of stock today doesn’t create an expectation that you’ll do the same next quarter. Cancel a dividend, however, and you are alerting the market (and your competitors) to a cash-flow problem. Finally, many people assume buybacks to be a better way of boosting the stock price, since reducing the number of shares outstanding raises earnings per share.
The popularity of buybacks may soon change, however. Demographics and market conditions are creating a large group of investors that will increasingly demand income-producing stocks. Furthermore, there is new evidence that for companies able to make the commitment, dividends may provide a bigger boost to share price than buybacks.
The Harvard Business Review report sold on Amazon.com also expresses some doubt about buybacks. Author Justin Pettit says that managers routinely underestimate how many shares they need to repurchase to send a credible signal to the market. What’s more, Pettit contends that buybacks can backfire if executives don’t fully understand why, when, and how to use the technique.
At midday on Monday, Amazon’s share price was up 3 percent to $28.88. The company has about 419 million shares outstanding.