Review of stock share prices::How Much Is One Share of Microsoft Stock
Many large and intermediate companies have been repurchasing their shares on the open market. This practice has continued for several years. It has helped many companies report higher quarterly earnings per share. A company may report the same income as in previous quarters and it appears that earnings are rising. That is because those earnings are divided among fewer shares of stock. In 2001, buybacks totaled $132 billion. Now, in 2007, they are expected to go over the $600 billion mark. The level of buybacks continues to increase. It topped out at $437 billion last year. And, over the last seven years, the amount spent on share repurchases has inched close to the two trillion dollar mark. This practice has been another one of Main Street's follow-the-leader ploys. A few companies start buying back shares, and soon there is a tidal wave of copycats. The common theme on Wall Street is that buybacks result in higher stock prices. The heard mentality subscribes to this belief; hook, line and sinker. Such companies as IBM, Intel, Microsoft, Procter and Gamble and Dell have not participated in the huge stock market run up. Sure, their stocks may be somewhat higher from the lows of 2002. Overall, they have been buying back shares steadfastly and their stock prices have basically drifted sideways. Why buy back your own shares? The main reason is to keep earnings looking healthy. Healthier earnings usually result in a higher stock price. For the main owners of the company's shares, such as inside management, this means a higher valuation for their holdings. Management could then sell those shares on the open market and realize greater gains. Actually, the company does nothing to create more value within itself. The process is a function of reporting income based on a lower number of outstanding shares. Is this the wisest use of capital funds? Younger businesses, when they become public, usually have a small number of shares to start with. After many years of growth and expansion, the number of outstanding shares grows as more are issued. They are sold to investors to raise more capital. Stock splits or special stock dividends also help to increase the number of shares. The issuance of stock options to company employees also can add to the mix. It is not uncommon for a company to pay $40 on the open market for a share of its stock. And, turn around and issue new shares from redeemed stock options for $5 or $10 a share. Essentially, they pay out $40 and get back $10 for a share. A small company may have ten or 20 million shares outstanding. A mature company could have hundreds of millions or even billions of shares on the books. Profits could be used to expand the business. They can be used to buy other companies. Also, excess profits can be used for research and development. Systems and equipment can be upgraded or replaced. New buildings and facilities can be constructed. All of these alternatives help to create jobs and build a stronger company. This also results in a stronger economy because many businesses are affected. Someone has to supply the needed equipment and technology to expand these businesses. A company may also pay down its debts or pay shareholders a higher dividend. There are a number of uses for this excess cash that will, in the long run, create much more shareholder value. An economic downturn will not keep share prices higher. All that spent cash will be wasted when share prices head south. Will these companies be buying back shares when they are trading at discount prices? Nope! They will be hoarding their cash as they attempt to wait out the economy. This leads to another question? How much stronger would the economy be if that two $trillion had been spent on capital goods and expansion? The main point is this; share buybacks mask the true growth of a company. Wall Street puts a high value on EPS (earnings per share). That bottom line figure can be manipulated by changing the number of outstanding shares. Buybacks have looked great over the last four or five years. These companies may be cutting their own throats with their shortsightedness. True economic growth can only be sustained by investment in capital goods and services. This leads to the creation of viable jobs. More people working means more consumers available to buy good and services. Share buybacks can be compared to dividends. You buy a stock with a 6% dividend yield, only to find that it has fallen by 20% in price. Everyone says that share buybacks are a sign that a company is healthy. But, if these companies are expecting to be doing so well in the future, then why not expand the business? This would normally lead to bottom line growth and a continued favorable share price. The questionable use of cash to buy back shares is telling us a different story. Could it be that many companies see less favorable selling climates in the future? The quickest way to stabilize share prices is to lesson the float. The best way to create shareholder value is to grow the business. You can bet that Uncle Sam has his eye on some of those profits. He just might one day figure that if all a company has to do is buy back shares, some of that excess cash needs to be taxed. When that happens, big business will have only itself to blame. |
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