Why Surge in Buybacks May Ease

Why Surge in Buybacks May Ease
As Credit Gets Tighter, Many Firms May Tread With Greater Caution

http://online.wsj.com/article/SB118644353748689859.html?mod=rss_whats_news_us

By JUSTIN LAHART
August 7, 2007

If credit-market troubles make it harder for companies to borrow, the raft of share buybacks that has been helping to buoy the stock market could become a thing of the past.

Companies have been buying back shares at a breakneck pace, repurchasing a record $122 billion of stock in the second quarter alone, according to Standard & Poor's estimates. Those buybacks have helped propel the stock market higher because they have reduced the supply of shares available to invest in and, in doing so, have also raised per-share earnings.

Last Friday, Procter & Gamble Co. said it plans to buy back $24 billion to $30 billion of its shares over the next three years, and yesterday Wells Fargo & Co. said its board had authorized it to buy back as many as 50 million shares of its stock.

But with the trouble in subprime mortgages spreading to the bond market, fewer companies may be buying back shares in the months to come. Corporate bond prices have fallen sharply in recent weeks, sending their yields, which go in the opposite direction, higher. Although corporate borrowing costs are relatively low, historically speaking, companies have cut back sharply on debt issuance. In July, companies issued just $29 billion of corporate bonds, down from $128 billion in June.

"Buybacks were, for the most part, supported by pretty healthy cash balances, but some companies were borrowing to do buybacks," says Brett Gallagher of Julius Baer Investment Management. "To the extent that there's lower availability of credit, those companies won't be buying back shares anymore."

Last month, online travel company Expedia Inc. cut its planned buyback to 25 million shares from the 116.7 million it previously announced, citing "the lack of available financing, on terms satisfactory to the company, as a result of current conditions in the credit markets."

Credit-ratings firms have been critical of buybacks when it appears that companies may have to tap the credit markets to fund them. Last month, for example, Moody's Investors Service cut its ratings for Home Depot Inc., and said it might cut it further based on higher expected debt levels from the company's planned share buybacks.

Federal Reserve figures show that nonfinancial companies retired a record net $602.1 billion of shares last year, and issued a record $454.5 billion in debt.

Some companies, of course, still have strong balance sheets, and if the stock market continues to suffer they may take advantage of lower prices to buy back shares. But as a whole, U.S. companies no longer appear to be generating enough cash to finance share repurchases, says Douglas Cliggott, chief investment officer at Greenwich, Conn., money manager Dover Management.

"It seems like corporate America does need to borrow money if it wants to buy shares back," he says.