Where Have All the Buybacks Gone?

Qualcomm tries a share repurchase, and gets hammered. Use of the technique has been sharply off in this downturn, as some suggest its counterproductivity.

Qualcomm Inc. boosted its dividend by 14 percent, and unveiled a new $2 billion stock repurchase program to replace its previous $3 billion buyback program, which had $2 million of remaining availability.

The moves, of course, were designed to boost the company’s stock price. But investors were apparently unimpressed by the news. Shares of the maker of digital wireless communications products and services on Tuesday had slid 1.6 percent by midday, while the overall stock market surged around 2 percent.

What gives?

One explanation may be that buybacks have suddenly become passe´. In fact, Qualcomm is one of the only sizable companies to announce a major buyback in recent weeks, when lots of companies might seem to need some share-price bolstering. The Minneapolis Star Tribune last month reported that new stock-repurchase activity among Standard & Poor’s 500 companies is expected to fall by 40 percent in the fourth quarter of 2007 when S&P reports these figures in a few days. Buybacks hit a record high of $172 billion in the third quarter.

(A notable exception was IBM, which authorized a $15 billion stock repurchase program, at the end of February. Big Blue said it was part of a drive to improve per-share earnings growth.)

But why are other companies cooling to buybacks?

Managements at many of them apparently want to hold on to the cash as the economy continues to worsen. And they may doubt the wisdom of buying stock now, when conditions could deteriorate further in the near future.

Perhaps many companies also read the S&P study published late last year, which found that among S&P 500 companies repurchasing their shares over the last 18 months, only one of out every four outperformed the S&P 500 Index. The remainder would have been better off putting their excess cash into an S&P 500 Index exchange-traded fund.

“The tendency is to assume that corporate share repurchases lead to a sustained uptick in stock performance, and the more activity the better,” note the study’s authors, associate director Stewart Glickman, and senior associate Todd Rosenbluth, of Standard & Poor’s Equity Research. “While these initiatives may create a positive aura around a company’s shares, our study showed an inverse link between repurchase activity and the returns achieved — the companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period. Based on these findings, we recommend shareholders take a close look at a company’s buyback history and their results before bidding up share prices.”

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