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
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.