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Question the motives behind big stock buybacks
By Rachel Beck, AP
St Paul Pioneer Press
Friday, November 24, 2006

When it comes to stock buybacks, corporate leaders have mastered the game of doublespeak.  At the same time they are touting the advantages of repurchasing shares on their investors' dimes, some are cashing out of their own stock holdings.

Just look at what has been going on at Kohl's Corp. since the retail chain announced its first-ever buyback program in March.  Its stock has jumped more than 45 percent as the company has bought back 20 million shares for $1.2 billion.  Its top brass have taken advantage of that climb by selling more than $500 million of stock.

The timing of such events could be pure coincidence.  But it calls into question the often-repeated view that buybacks are a bullish indicator of executives' view of the future.  Buybacks happen when companies go into the open market to purchase their stock, usually with cash.  They've grown increasingly popular in recent years thanks to the hoards of cash piling up on corporate balance sheets.

Companies in the Standard & Poor's 500 stock index spent a record $349 billion last year on share repurchases, up from $197 billion in 2004.  This year could top that, given that buybacks totaled $325 billion over the first three quarters, according to S&P.

Investors often cheer buybacks because they think it means executives see good times ahead.

But buybacks also can mask the transfer of wealth through stock options to company insiders.  In some cases, companies repurchase their shares and then grant options to employees or issue stock for mergers and acquisitions.

The hard part for investors is determining whether large insider sales during buyback periods is bad news or not.  One research firm, at least, is raising a red flag about the issue.

In a report last June, Audit Integrity, a governance and accounting research firm, warned its clients stock investors, insurers, auditors and the like to keep close tabs on such potential conflicts.

"Anyone who is a corporate stakeholder is very concerned that management is acting in their own self interest, and when this goes on, it seems to be a perfect example of that," said Jack Zwingli, CEO of the firm.

At Kohl's, corporate leaders only sold $27.5 million in shares from March 2005 to February 2006.  But their selling zoomed to 18 times that since the retailer announced in March its plans to buy back $2 billion in stock over the next two to three years.  Most of the selling comes from members of its board of directors and those related to them, according to Thomson Financial.

The Menomonee Falls, Wis.-based retailer did not return calls for comment.

Kohl's executives could have stock options with exercise dates expiring, or maybe the options are finally worth something, so they cashed out.  Some stock sales could be routine program transactions, planned out long before the buybacks went into effect, or it could be that the executives needed the money to pay for personal expenses.

Whatever the case, the buybacks didn't foretell much about Kohl's financial health.

Rachel Beck is the national business columnist for The Associated Press.

http://www.twincities.com/mld/twincities/16080054.htm