Stock buy-back (redemption) programs are a frequent occurrence among publicly traded corporations. Using the Internet as your sole research source, find at least six publicly traded corporations that announced stock buy-back programs in 2015. What are some of the reasons noted by these corporations for the buy-back programs?
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Six publicly traded companies that had stock buyback programs during 2015 are Apple (1), Pfizer(2), Microsoft(3), Verizon Communications(4), Gilead Sciences(5), and United Technologies(6).
Some of the reasons given for the buyback are that the companies see a bright future. Apple sees a bright future and confidence is given as the reason for the large buyback. In cases of Microsoft the reason given is that Bill Gates and other large insiders are selling lage volumes of their shareholdings. The repurchase program is design to buy the shares that the insiders including Bill Gates is selling. The reason for the buyback given by Gilead is that it wants to return capital to its shareholders. One reason given in the press is that when management assigned options as a part of management compensation, to prevent stock dilution, a buyback was announced. In case of United Technologies the explanation given by the Chief Executive Officer Gregory Hayes was that since the company had shelved large plans for making acquisions, it was directing cash towards buybacks. The result was a rally in the stock prices. This leads to the suspicion that reason for the buyback was to prop up the slumping share prices. The slumping share prices make takeovers less attractive. The logic given is that United Technologies is setting itself up for takeover instead of it making a takeover bid.
The stock buyback is a predictor of stock underperformance. According to the S&P buyback Index performance at the buyback companies was poor in 2015. The buyback index measures the performance of the 100 stocks with the highest buyback ratios in S&P500. Also, the use of buybacks tends to support the view that the best years of the company are over for the company that it is late in the cycle of its success. The explanation given by Apple was that Apple's stock buybacks are part of a dividend and share repurchase program announced in March 2012, which initially was slated to buy back $45 billion over three years but then was expanded to $100 billion in 2013. According to Fortune, Apple's repurchase program means that the company has plenty of cash but when it repurchases it own shares, it is a warning sign. In contrast to other tech giants, Apple's insider selling was relatively less.
There are some common reasons these companies buyback their own stocks. It is a method of paying back investors and reducing the overall cost of capital. Further, these companies often take advantage of undervaluation to repurchase their shares. If a short term performance is weak or there is a dramatic news item that drives the share prices down, the company may repurchase the shares and re-issue them once the market has risen. The company's capital increases without issuing additional shares. Finally, buyback of shares increases the earnings per share ratio of the remaining stock and makes it attractive to investors.