Credit squeeze hits buy-back schemes By Francesco Guerrera in New York
Published: September 17 2007 22:02 | Last updated: September 17 2007 22:02
US companies are cutting back on share buy-backs, a sign of their fear that a prolonged credit squeeze and a sharp economic slowdown could take a severe toll on their operations.
After two record-breaking years for share repurchases, September is set to become the weakest month in nearly four years, with just $3.7bn-worth of buy-backs announced so far, according to Thomson Financial.
Last week was the slowest of the year for buy-backs, increasing the likelihood of the monthly total falling to the lowest level since November 2003.
The drop in buy-back activity highlights the defensive stance adopted by US companies in the face of a liquidity squeeze and the increased probability of the economy slipping into recession.
The rise in borrowing costs caused by the recent credit turmoil compounded problems for companies that had taken advantage of low interest rates to fund buy-backs with debt.
A decline in share repurchases could hit companies’ reported earnings – as buy-backs boost earnings per share by reducing the number of shares in issue.
A recent study by Thomson Financial estimated that buy-backs would account for more than a fifth of earnings growth for S&P 500 companies in 2007.
Chief executives say that, although buy-backs were a favourite tool to redeploy excess cash, reward shareholders and boost earnings per share during the bull market, difficult times call for more prudent balance sheet management. “The current stance makes perfect sense,” said the chief executive of a large company last week. “At the moment, everybody wants to make sure they have enough liquidity and cash resources to weather the downturn.”
A sustained fall in the level of buy-backs would hit shareholders, who received more than $430bn from share repurchases since the beginning of 2005.
Daniel Gates, North America chief credit officer for Moody’s, the credit ratings agency, said companies with buy-back programmes might decide to delay them to preserve their cashflow.
Moody’s responded to last week’s decision by McDonald’s, the US restaurant chain, to increase its dividend and buy-back programme by saying it might downgrade the group’s rating.
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