NEW YORK (CNNfn) - As any chief financial officer knows all too well, shareholders can be a high-maintenance bunch, prone to losing their cool at even the tiniest speed bump in a balance sheet.
Hence the investor's need for lots of tender loving care and coddling of a kind that markets, with their brutal gyrations and callous disregard for human foibles, are pitifully ill-equipped to lavish.
Fortunately, when investors start getting antsy -- as many have in the wake of the Dow's latest, weeklong skid -- Corporate America has a potent tranquillizer in its remedial arsenal: the stock buyback.
"It's nice for the shareholders to see companies doing this because it makes them feel good about their stock," said Todd Eberhard, the president of Eberhard Investment Associates Inc. "Companies use this as a way to get the public to understand that things aren't so bad."
The traditional stock buyback -- under which a company repurchases its own shares from investors -- is so commonplace in the age of the steady-as-she-goes bull market as to be a cliche. Firms typically resort to buybacks when they want to send a signal to investors that they believe their securities are undervalued. The idea is to boost demand by reducing supply, which, in theory at least, should send the price up.
Also, since repurchased shares are no longer used in figuring per-share results, such as earnings, buybacks also often carry the added benefit of improving the per-share measures of a company's performance.
But not all buybacks are created equal, as a look at the latest spate suggests. This week, against a backdrop of a major erosion of values on the Big Board and declines in bond prices, three high-profile firms have rolled out plans to snag back from investors as much as $5 billion of their own stock.
End goal to raise share value
In each case, the impetus behind the moves seems to vary. Presumably, however, the goal is the same: to raise share value.
On Wednesday, Columbia/HCA Healthcare Corp. said its directors had authorized the repurchase of $1 billion of its common stock. At current trade prices, the buyback would represent just more than 5 percent of the firm's $19 billion market capitalization, based on 647 million outstanding shares.
Meanwhile, manufacturing giant ITT Industries Inc, -- with an eye on productive uses for $2.6 billion in expected after-tax proceeds from the pending spinoff of its automotive electrical systems and its brake and chassis business -- plans to buy back $1.1 billion in stock.
ITT said Wednesday it would use the remainder of the cash to grow its core fluid technology, defense, electrical connectors and automotive parts operations. The buyback would be the largest since ITT Corp. split into three companies in 1995.
Nonetheless, the ITT program is dwarfed in magnitude by a buyback announced Tuesday -- Merck & Co.'s plans for a new $5 billion repurchase to supplement another $5 billion repurchase begun in February, on which the firm has already paid $2.5 billion to acquire 24 million shares.
Merck (MRK), which has 1.19 billion shares outstanding, also declared a quarterly dividend of 54 cents a share for the fourth quarter of 19998, up from 45 cents in the third. The announcement of the buyback plan lifted the stock from a low of 121 to as high as 126-3/16 on Tuesday, but by day's end had settled back 75 cents to close at $124.31. On Wednesday, Merck was down 5/8 at 123-7/8.
Columbia and ITT, by contrast both gained. Columbia's shares climbed 7/8 by midday Wednesday, to 28-3/4, while ITT's stock inched up 13/16 to trade at 33-5/16.
Eberhard said the Columbia buyback was intended to reassure investors at a time when the company has been embroiled in a nasty controversy related to its medical billing practices. In that sense, he said, the repurchase can be viewed as a defensive strategy.
The company's directors "are saying, `Hey, it's not so bad,' " Eberhard said. "People will get a new read on the stock."
Merck's move, by contrast, was more aggressive, aimed at growing the company's generally prospering business lines while reversing a recent slump in share value.
"They want to pull back money, pull back control and push up the stock price," he said, noting that the repurchased shares also would save the firm some dividend costs.
Others see the buybacks as a sort of pre-emptive strike in the face of mounting shareholder concerns about a slowing economy. "A lot of companies are kind of pre-announcing uncertain second halves, or disappointing second halves," said Kevin Bannon, executive vice president of the Bank of New York.
"Also, a lot of companies are generating a lot of excess cash" and rather than just let it sit there, "they want to make use of it."
A bias towards selling hard assets?
Lars Bergan, an equities analyst at Argus research, said he views the rash of buybacks as evidence of "a bias in favor of companies that seem to be selling hard assets and using the cash to buy back stock." Bergan played down a suggestion that the buybacks could be justified on the basis of undervaluation alone.
"When the market's up 20 percent in a year, it's hard to defend the idea that the big cap stocks are undervalued." Rather, he described buyback programs as "the current fad," a fad fueled by the availability of cheap loans.
"No one wants to pay for bricks and mortar, so instead they sell their factories," Bergan said. "It's a combination of the current sort of yahoo prejudice against hard assets that you can see and touch, and low interest rates."
Others counter that buybacks are not, in fact, coming at the expense of investment in infrastructure.
"Businesses have been investing at a record pace in productivity enhancing equipment," said Ron Hill, an investment strategist at Brown Brothers Harriman. Buybacks, in this context, may be seen as icing on the cake. "If you have free cash flow beyond your investment needs, then how do you increase value to shareholders?" Hill said.
Hill said in his experience, buybacks have a "longer-lasting impact" on share value than raising dividends.
"They're not done at the expense of investing in the future of the company," he said.
--By staff writer Douglas Herbert