How to Tell if a Firm Will Pay Cash, Not Lip Service, in Stock Buyback
SOUTHEAST JOURNAL-WSJ

With shares being hammered by a tumultuous market, it's stock buyback time in the Southeast.

Since Aug. 3, when the market began tumbling, 72 firms in the region have said they plan to buy back $2.8 billion of stock, according to CommScan, a New York securities-research firm. The theory is simple enough: The companies feel their shares are undervalued and that the best use of their cash is to buy them back. Such action automatically increases per-share earnings because there are fewer shares outstanding by which to divide net income. And higher per-share earnings can boost a company's sagging stock price.

A 1995 study by David Ikenberry, a finance professor at Rice University in Houston, found that the stock of companies that held buybacks outperformed Standard & Poor's 500-stock index by about 12 percentage points, on average, over four years.

The trouble is, the buyback theory doesn't always play out for investors hoping to hop aboard for a quick ride upward.

For starters, in a down market, a buyback announcement doesn't mean a stock will immediately pop. Indeed, the shares of most of the 72 companies authorizing buybacks have stayed flat or dropped even more.

"Part of the problem is that these announcements have been made in a bear market," says Christianna Wood, a fund manager at Westcore Funds in Denver. "You can't defy gravity."

And just because a company says its board has authorized a buyback doesn't mean it will follow through.

"It can be deceptive," Ms. Wood says. "You have to sort of dig deeper to find at what price [the company is] going to start buying" stock.

The popularity of buybacks rose after the stock-market crash in 1987. "A lot of companies got religion," says Mr. Ikenberry, after seeing their stock value plunge.

Now, with the market's latest turmoil, says Matthew Heiter, a securities attorney at Memphis firm Baker, Donelson, Bearman & Caldwell, "we're seeing companies that are growth-oriented and a little bit miffed at what the market has done to their stock." In addition, he says, companies "are looking for . . . a beneficial use for that cash."

Buyback experts note that sometimes the mere act of announcing a buyback boosts a stock price, eliminating the need for a company to buy the stock.

In a study released in August, James Westphal, an assistant professor at the University of Texas at Austin, looked at 412 large companies that made buyback announcements from 1985 to 1991. His finding: 38% of the companies didn't buy any shares over the following five years. Two-thirds didn't buy all the shares they had authorized.

"That was a larger percentage than what we expected," Mr. Westphal says.

With "a lot of people," says Frank Jolley , president of Jolley Asset Management in Rocky Mount, N.C., "it's just lip service. If they don't [buy shares], the next time they announce it, nobody listens."

Thus, investors looking at a company's buyback announcement should be cautious before parting with their money.

While securities laws do provide some protection -- a company can't manipulate the price by buying shares at the opening bell or in the last half-hour of trading, for example -- nothing requires a company to actually follow through with a buyback announcement.

And unlike in Canada, where companies have to publish a monthly buyback report, U.S. companies don't have to divulge how much they're buying -- if they're even buying at all.

So how can investors tell whether a buyback is for real? Experts suggest a few clues to help determine just how quickly a company will open its wallet after a buyback announcement:

CASH IS KING: A strong balance sheet is essential for a company to pay for the stock. "You would need strong cash flow or it wouldn't make sense," says Michael Dunn, a spokesman for Coltec Industries, a Charlotte maker of landing gear for airplanes. "Otherwise you would be taking on more debt."

Coltec generated $52 million in cash flow from operations after capital expenditures during the first three quarters of this year -- plenty to dip into for a buyback, says Mr. Dunn.

So on Oct. 13, Coltec said its board approved an expansion of a buyback plan begun in June, doubling it to $100 million. It was in the market the next day, buying stock at $13 a share. The stock had hit a 52-week high of $26.438 in March. It has bought $36 million of stock so far.

VERIFYING THE VOLUME: Unless a company has sufficient trading volume in its shares, it can end up virtually alone in buying or selling large chunks of stock.

Consider Atlanta-based Radiant Systems, which on Sept. 21 said it planned to buy up to three million of its shares.

A month later, the provider of back-office computer systems for retailers still hasn't bought its stock, which is relatively cheap at $5.875.

Radiant's chief financial officer, John Heyman, blames light trading volume. "Frankly, we would have been bidding against ourselves with the low volume," Mr. Heyman says.

Trading in Radiant's stock has averaged 117,161 shares a day since the company announced the buyback.

A LOOK INSIDE: Top executives' buying of shares is a strong signal that their company's stock buyback will occur. "When insiders are buying at the same time as a buyback, it kind of confirms the concept," says Paul Elliott, an analyst at CDA/Investnet, a Rockville, Md., monitor of insider trading.

Coltec's chief executive, John Guffey, for example, bought 51,400 shares in July and August. It was Mr. Guffey's first-ever purchase, according to Coltec.

THE TRACK RECORD: A company's history in the buyback arena may help predict its future actions.

At first glance, CryoLife looks like a strong contender to follow through on its Oct. 14 announcement that its board had authorized a buyback of up to one million shares. The Atlanta company has enough cash: $15 million from the September sale of medical-device patents.

But in April 1997, CryoLife announced a buyback plan -- and within the next six months its stock price doubled to $17. It didn't buy any stock. CryoLife's stock currently trades at about $9.

After the latest announcement, one analyst inquired, "Does this mean that you're going to cut back on projects?" recalls Chief Financial Officer Edwin Cordell. "The answer definitely was `No.'"

As for the timetable of the current buyback plan, Mr. Cordell says there is none. "At the current level, we intend to follow through on our buyback," he says. It could be a "couple of months -- or a couple of years."

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Buyback Binge

The 10 largest stock buybacks announced by Southeastern firms since Aug. 3

                                                Tuesday's
                     Date         Value*         closing
Company            Announced    (millions)        price

BankAmerica        Sept. 24      $1,175           tk
Shaw Industries    Sept. 3          255           tk
Promus Hotel       Aug. 13          200           tk
BB&T               Sept. 17         118.5         tk
Clayton Homes      Sept. 13          89.1         tk
Cracker Barrel     Sept. 9           76.5         tk
Springs Industries Aug. 20           73.3         tk
Quorum             Aug. 26           59.6         tk
Coltec Industries  Oct. 13           50           tk
PhyCor             Sept. 22          50           tk

*Value determined either by announced amount of buyback or by
multiplying shares times closing price on day of announcement. 

Source: CommScan

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