Sunday, November 13, 2005

Cash Cows: Techies And the Buyback Shuffle

Technology companies across America are buying back their stock hand over fist.

Debt free and armed with bulletproof balance sheets, what's a techie to do with all that cash?

Well, you could go the Oracle route and buy everything with a price tag.

Oracle shares are getting walloped this year so going on an acquisition spree is probably not a good idea.

Other companies are repurchasing their shares from investors.

They're stripping shares out of circulation and raising the earnings per share.

Great idea, right?


Most investors get giddy when companies announce buybacks.

We turn cautious.

We only accept buybacks when all other opportunities for creating shareholder value have been exhausted.

Before the champagne pops, we'd like know why the company isn't increasing its dividend before it buys stock back.

Dividends are money in your pocket; you can then decide if you want to take the cold cash or buy more shares.

Alternatively, why not spend the cash on research and development, or in some other way that will cause the business to grow?

Or has management has simply run out of ideas for growing the business?

Companies often say their shares are trading at attractive prices, so that buying them is a good investment.

What companies don't realize is that whenever they announce a stock buyback, they're also raising a red flag and inviting analysts like us to deconstruct their annual reports and conference calls even further.

Why is the stock trading lower?

Finally, growth addicts would probably prefer to see the companies they are invested in deploy all their spare cash towards acquisitions.

In sum, cash cows like Cisco (CSCO), Microsoft (MSFT), and Intel (INTC) are buying back their stock in droves.

But don't embrace the idea without raising the proverbial eyebrow.

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