Tags: stock | buyback | repurchase | shareholder

Gretchen Morgenson: Beware Pitfalls of Stock Repurchase Plans

Image: Gretchen Morgenson: Beware Pitfalls of Stock Repurchase Plans

By    |   Monday, 14 Mar 2016 03:49 PM

Companies are buying back their stock at a pace not seen since before the financial crisis, but that doesn’t mean investors should also jump into the market.

If the last market collapse is any indication, company managers are terrible at timing the market. Moreover, their buybacks may not help shareholders, writes Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the New York Times.

“Not all buybacks are created equal, and exhibit A is LPL Financial Holdings, a brokerage and investment advisory firm in Boston,” Morgenson writes. “LPL recently completed a $275 million stock buyback spree that was exceedingly costly, increased the company’s debt and wound up primarily benefiting a powerful insider investor.”

The brokerage funded part of the buybacks with borrowed money, which can be a recipe for disaster. Companies that take on too much debt can impair their profitability or even default, which leaves shareholders with worthless stock.

That threat hasn’t stopped companies from buying back stock in droves, especially when C-level executives are given stock-option incentives to boost share prices.

Repurchase authorizations are up 41 percent through Feb. 11 from the same period last year, according to Birinyi Associates, a stock market research firm cited by the NYT.

In the case of LPL, the buybacks favored such private-equity firms as Hellman & Friedman and TPG Capital, Morgenson says.

“By Dec. 10, LPL said it had completed an accelerated plan, repurchasing $250 million in stock, or 5.6 million shares. Its average cost a share was about $44.50, the company said,” Morgenson writes. “But instead of going into the open market to buy the stock, LPL repurchased 4.3 million shares from TPG, the private equity firm and partial owner. That meant more than three-quarters of LPL’s $250 million buyback spending went to TPG.”

Standard & Poor’s 500 Index companies are poised to buy back as much as $165 billion of stock this quarter, approaching a record reached in 2007, according to Bloomberg News.

The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever, the newswire reported.

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Companies are buying back their stock at a pace not seen since before the financial crisis, but that doesn't mean investors should also jump into the market.
stock, buyback, repurchase, shareholder
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2016-49-14
Monday, 14 Mar 2016 03:49 PM
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