Buyback Seen As Disappointing Move
By Roger Cheng
Of DOW JONES NEWSWIRES
Thursday, October 5, 2006
NEW YORK -(Dow Jones)- Qwest Communications International Inc.'s
(Q) decision to buy back $2 billion worth of stock represents a
timid initial step toward returning value to shareholders.
The move is the latest chapter in the turnaround for a company
that was all but written off last year. Yet investors had
expected more -- a regular dividend was the most widely
speculated route -- and those expectations drove Qwest shares to
a four-year high of $9.22 last month.
More recently, Qwest traded at $8.33, down 37 cents, or 4.3%, on
volume of 17.4 million shares. Average daily volume is 15.1
"We sense there could be a knee-jerk reaction suggesting some
level of disappointment with the lack of a tangible dividend
component," Banc of America analyst David Barden said in a note.
The decision to go with a stock-buyback plan may lead some to
speculate on the confidence of its longer-term ability to
generate cash. A buyback program allows Qwest to pick and
choose when it will spend the money over a two-year period,
while a dividend represents a regular payout to shareholders.
"The plan seems to speak to a high comfort and visibility into
cash flow through 2008, but perhaps a hesitation at this stage
to commit to distributions beyond this," Barden said.
Qwest spokesman Nick Sweers said the company opted for a buyback
partly because it wouldn't have to pay taxes for the program
versus dividends. A buyback also allowed the company to return
value in a "prudent and disciplined manner."
Still, the buyback, which represents 12% of its market
capitalization, as of Wednesday's closing price, is a step in
the right direction toward matching its industry peers. The
phone industry relies on its free cash flow for dividends and
stock buybacks to compensate for a deterioration of the
Assuming Qwest spends $1 billion a year over the next two years
on its stock, Barden estimates the company will spend roughly
52% of its free cash flow over the next two years on the
The analyst doesn't own a stake in Qwest, but his firm has an
investment-banking relationship with the company.
The news contrasts with the company's position more than a year
ago. That's when the company, burdened with heavy debt and
continued losses, entered into a bidding war with
Verizon Communications (VZ )
for MCI Inc. -- which it eventually lost. Since then, Qwest
posted its profit for the first time in several years during the
first quarter, and Wall Street has grown more comfortable with
Qwest kept the possibility open for further programs to be
implemented. "It is our intention to fully achieve this plan
over the next two years, while reviewing, on a regular basis,
opportunities to enhance shareholder returns," Chairman and
Chief Executive Richard Notebaert said in a statement.
Bear Stearns analyst Mike McCormack said a dividend isn't
likely to be offered in the near term. He had expected a
combination of a dividend and stock-buyback plan.
"A dividend would have signaled a greater degree of confidence
in the long-term sustainability of free cash flow and provided
valuation support," he said in a note.
The analyst doesn't own a stake in the company, and Bear Stearns
has no investment-banking conflicts to report.
Others, however, are holding out hope for a more aggressive move
by Qwest. "We believe the company will continue to enhance its
cash return program over the next 12 months, as management was
clear in our meeting earlier this week that it was comfortable
it had multiple levers it could pull to further return cash to
shareholders," Raymond James analyst Frank Louthan said in a
The analyst doesn't own a stake in Qwest, but his firm is
seeking an investment-banking relationship with the company.
- By Roger Cheng, Dow Jones