BERNARD CONDON

Companies lose billions buying back their own stock

NEW YORK (AP) — If you think your stocks are doing poorly, check out the performance of some of the most sophisticated investors, the ones with more knowledge about what’s going on inside businesses than anyone else: Companies that buy their own shares. The companies losing money on these bets are down a collective $126 billion over the past three years, a decline of 15 percent. Many corporations would have been better off investing that cash in an index fund instead of their own stock. The overall market rose 39 percent over the same period. The companies could also have distributed that cash as dividends to shareholders, allowing them to spend what is, in the end, their money. And it’s not just a few big corporate losers accounting for all the pain. The group includes 229 companies in the Standard and Poor’s 500 index, nearly half of the companies in the study prepared by FactSet for The Associated Press. When a company shells out money to buy its own shares, Wall Street usually cheers. The move makes the company’s profit per share look better, and many think buybacks have played a key role pushing stocks higher in the seven-year bull market. But buybacks can also sap companies of cash that they could be using to grow for the future, no matter if the price of those shares rises or falls. And the recent losses highlight another criticism: Companies may be good at finding oil or selling bathroom trinkets, but they aren’t always smart stock investors. Some corporations bought ever more of their own shares even as prices tripled from financial-crisis lows and several measures showed the market was overvalued. “Whenever you see a buyback, the company always says, ‘We think our stock is cheap,’” says Nicholas Colas, chief market strategist at brokerage ConvergEx Group. They are sometimes so confident that they take out enormous loans just to buy more and more shares. That those shares have now plunged in value is something Colas calls a “great irony” of the bull market. Among the companies with the biggest paper losses are struggling ones that bought after their stock fell, only to watch prices drop even more. Macy’s, the beleaguered retailer, is down $1.5 billion on its purchases, a 26 percent loss. American Express has lost $4.1 billion, or 34 percent. As the price of oil plunged, driller Chevron racked up $2.8 billion in paper losses, or 28 percent. The losses are also piling up in unexpected places, such as at companies that have generated solid earnings through most of the bull market, suggesting that there is danger when stocks of even top performers climb too high. Starwood Hotels & Resorts Worldwide and Ford Motor have each lost hundreds of millions on their buybacks, more than a fifth each of what they spent. Defenders of buybacks say they are a smart use of cash when there are few other uses for it in a shaky global economy that makes it risky to expand. Unlike dividends, they don’t leave shareholders with a tax bill. Critics say they divert funds from research and development, training and hiring, and doing the kinds of things that grow the businesses in the long term. “The company doing the most buybacks is often not investing enough in its business,” says Fortuna Advisor CEO Gregory Milano, a consultant who has written several studies criticizing the purchases. He says most buybacks are “financial engineering” and a waste of money. The study looked at 476 companies in the S&P 500 index, leaving out the index members that split off parts of their businesses during the period. Among the findings: $100 million club Nearly a third of the companies studied, 153 in all, lost $100 million or more on their purchases in three years. Not just about oil Four of the top 10 biggest dollar losers are energy companies. But big losses are hitting a variety of companies, including insurers and banks, retailers, technology companies, airlines and entertainment giants. Biggest winner, biggest loser MasterCard has the biggest paper gains from buybacks: $7.9 billion. IBM has the biggest paper losses: $9.8 billion. IBM says it isn’t neglecting long-term investments and notes that the money it spent on R&D, big projects and acquisitions last year was triple what it spent buying its stock. Gainers help, sort of When the companies that have profited from buybacks over the last three years are included with the losers, the paper losses narrow to $11 billion. Total spent on buybacks by all companies: $1.43 trillion, more than the annual economic output of all but 12 of 193 countries in the world, according to the World Bank. Stocks may bounce back, of course, turning losses into gains. But the history of buybacks isn’t encouraging. Companies often buy at the wrong time, experts say, because it’s only after several years into an economic recovery that they have enough cash to feel comfortable spending big on buybacks. That is also when companies have made all the obvious moves to improve their business — slashing costs, using technology to become more efficient, expanding abroad — and are not sure what to do next to keep their stocks rising. “For the average company, it gets harder to increase earnings per share,” says Fortuna’s Milano. “It leads them to do buybacks precisely when they should not be doing it.” And, sure enough, buybacks approached record levels recently even as earnings for the S&P 500 dropped and stocks got more expensive. Companies spent $559 billion on their own shares in the 12 months through September, according to the latest report from S&P Dow Jones Indices, just below the peak in 2007 — the year before stocks began their deepest plunge since the Great Depression. Bernard Condon can be reached at twitter.com/BernardFCondon.

Stocks sink on first day of 2016 on China, Mideast worries

NEW YORK (AP) — The new year got off to an inauspicious start on Wall Street as stocks tumbled Monday in a global sell-off triggered by new fears of a slowdown in China and rising tensions in the Middle East. The Dow Jones industrial average clawed back from a steep early decline but still ended down 1.6 percent, its biggest loss in two weeks. Markets in Asia and Europe were down more. The wave of selling on the first trading day of 2016 served as a reminder that worries over the fragile global economy that weighed on financial markets last year are not going away anytime soon. "It's going to be a turbulent year," said Kevin Kelly, chief investment officer of Recon Capital Partners. "This isn't a blip." The trouble started in China, where weak manufacturing figures in the world's second-largest economy sent the Shanghai Composite Index plunging 6.9 percent before Chinese authorities halted trading. Investors were also unnerved by heightened tensions between Saudi Arabia, a huge oil supplier, and Iran. Saudi Arabia executed a prominent Shiite cleric, prompting Iranian protesters to set fire to the Saudi Embassy in Tehran on Sunday. The price of oil swung wildly. In the U.S., the Dow slumped 276.09 points to 17,148.94. It was down as much as 467 points earlier in the day. The Standard & Poor's 500 index lost 31.28 points, or 1.5 percent, to 2,012.66. The Nasdaq composite fell 104.32 points, or 2.1 percent, to 4,903.09. The selling in China spread quickly across markets in other Asian countries, then to Europe. The DAX index in Germany tumbled 4.3 percent. Britain's FTSE 100 fell 2.4 percent, while France's CAC 40 dropped 2.5 percent. Huang Cengdong, an analyst for Sinolink Securities in Shanghai, said he expects more turmoil in the Chinese stock market ahead of corporate earnings reports. "There will be heavy selling in the near future," Huang said. Elsewhere in Asia, Japan's Nikkei 225 tumbled 3.1 percent, and Hong Kong's Hang Seng retreated 2.7 percent. South Korea's Kospi closed 2.2 percent lower. In the U.S., investors were also worried about data suggesting that slow overseas growth and low oil prices are continuing to hurt U.S. manufacturers. A report from the Institute for Supply Management showed manufacturing contracted last month at the fastest pace in more than six years as factories cut jobs and new orders shrank. In China, the Caixin/Markit index of manufacturing fell in December for the 10th straight month. The resulting stock drop markets in Shanghai and Shenzhen led authorities to halt trading under a "circuit breaker" mechanism announced late last year. It was the first time China used the system. The slowdown in China is worrisome around the globe because the country's manufacturers are huge buyers of raw materials, machinery and energy from other countries. Also, many automakers and consumer goods companies are hoping to sell more to increasingly wealthy Chinese households. Chinese authorities have been trying for months to restore confidence in the country's market after a plunge in June rattled global markets and prompted a panicked, multibillion-dollar government intervention. Ernie Cecilia, chief investment officer of Bryn Mawr Trust, warned that investors shouldn't overreact to Monday's drops. "A weak first day of the year doesn't portend that 2016 will be a down year," Cecilia said. "There are a lot of trading days left." Escalating tensions in the Middle East briefly sent the price of oil surging. Saudi Arabia said Sunday it is severing diplomatic relations with Iran, a development that could potentially threaten oil supplies. "Oil markets will be concerned that this could be an incremental step in a deteriorating political situation that might ultimately threaten world oil supply," Ric Spooner, chief analyst at CMC Markets, said in a commentary. Benchmark U.S. crude fell 28 cents to close at $36.76 a barrel on the New York Mercantile Exchange. Bond prices rose, sending yields lower. Investors tend to park money in U.S. government bonds when they are fearful of weak economic growth or turbulence in stocks and other markets. The yield on the 10-year Treasury note fell to 2.24 percent from 2.27 percent. In metals trading, gold rose $15 to $1,075.20 an ounce, silver lost 4 cents to $13.84 an ounce and copper fell six cents to $2.08 a pound. Brent crude, the international standard, edged down 6 cents to close at $37.22 a barrel in London. In other energy trading in New York, wholesale gasoline rose 2 cents to $1.291 a gallon, heating oil rose a quarter of a cent to $1.126 a gallon and natural gas edged down 0.3 cent to $2.334 per 1,000 cubic feet. ___ AP Business Writer Youkyung Lee in Seoul, South Korea and AP researcher Fu Ting in Shanghai contributed to this story.  
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