Only 38% of Stock Buyback Plans Are Carried Out, Survey Finds

U.S. corporate stock buyback plans, while often boosting share prices when the programs are announced, frequently amount to little more than symbolic acts because many companies never actually buy the stock.

About 38% of the biggest U.S. companies that announced stock-repurchase plans failed to buy back any shares during the following five years, according to a recent study.

And about two-thirds of the companies bought less than half the number of shares authorized in the repurchase program, the study showed.

“In announcing buyback plans, increasing the stock price may be their first objective and once met, implementation may become less critical,� said James D. Westphal. The University of Texas management professor is one of two authors of the study, which looked at stock buybacks announced from 1985 to 1991 by 409 major companies.

The study’s finding that most repurchase plans are never fully completed comes as 36 U.S. companies last week announced $11.6 billion in proposed buybacks--the biggest weekly total this year, according to Securities Data Co. The previous week, companies announced a record number of buybacks, with 72 companies saying they planned to repurchase $6.7 billion in their shares.

The figures may call into question conventional wisdom that repurchase announcements justify higher share prices, as a sign of management faith that a stock is undervalued.

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Still, many institutional investors say they’re not surprised--and don’t generally object if managers later decide they have better ways to spend a company’s cash reserves.

“If the stock gets too expensive, it may no longer be the best use of company money,� said Patrick McGurn, head of corporate governance programs at Institutional Shareholder Services.

At Harley-Davidson Inc., for example, the company has bought back fewer than half the 8 million split-adjusted shares authorized in a repurchase plan announced in March 1995.

The Milwaukee motorcycle maker’s shares rose 88 cents to $23.75 the day of the announcement.

As of June 28, according to Harley-Davidson’s most recent quarterly report, the company had repurchased 3.3 million shares under that buyback program and had bought an additional 600,000 shares under a separate repurchase authorization.

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Rather than completing the buyback, the company has invested $650 million to increase motorcycle production by expanding its manufacturing capabilities, said spokesman Chris Romoser. “Going forward, we’ll evaluate the best [use] of our funds in deciding whether to repurchase more shares,� he said.

Harley’s shares are now at $35.75.

Securities regulators say they haven’t studied the issue and that the circumstances of each instance would have to be reviewed before deciding whether unfulfilled buybacks might have misled investors.

“It depends on the situation and whether there was intentional manipulation,� said Christopher Ullman, a Securities and Exchange Commission spokesman.

It would be difficult for the SEC to prove intent, said James Doty, a former SEC general counsel who’s now a partner with law firm Baker & Botts in Washington.

Nevertheless, the SEC might become interested if a company repeatedly announces buybacks and fails to purchase any shares, he said.

Institutional investors traditionally view buybacks in a favorable light and aren’t particularly concerned whether companies complete the repurchasings, said McGurn of Institutional Shareholder Services.

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Some recent announcements of buyback plans haven’t caused the same boost in share prices that they once did, in part because shareholders have started to take repurchasing news “with more than just a grain of salt,� McGurn said.

The study, by Westphal and Northwestern University professor Edward Zajac, also found that companies where top executives have more influence over their boards were more likely to engage in what the authors call “symbolic� buyback announcements that never occur.

Companies also were more likely to announce buybacks that weren’t completed when their executives had affiliations with other companies that made such symbolic moves.

“They saw it work firsthand for other companies,� Westphal said.

Past studies have shown that large repurchase plans are associated with particularly large share price advances, Westphal and Zajac said in their study, which was released at a management conference in San Diego last week.

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The buyback announcements themselves typically don’t make promises about when companies will purchase the shares, and offer no guarantee they will occur completely or at all.

Some buybacks are shelved when companies engage in mergers or acquisitions, because regulations raise questions about whether a merger can get favorable treatment as a pooling of interest when companies are buying back their own shares, McGurn said.

For instance, before NationsBank Corp. acquired Barnett Banks Inc. in January for $15 billion, both companies had to terminate repurchasing plans to comply with pooling-of-interest rules.

At Coca-Cola Enterprises Inc., the Atlanta bottling company that distributes two-thirds of all Coca-Cola products sold in the U.S., the company cited “significant acquisition activity� to explain why it bought back no shares in 1996 or 1997, after announcing in April 1996 that it planned to buy back 30 million split-adjusted shares.

The company restarted the plan in January and had repurchased about 1.5 million shares of the 30-million-share authorization as of July 3, according to its most recent quarterly report.

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The pace of the buyback has picked up in recent weeks, as Coca-Cola Enterprises shares have fallen about 32% from a 52-week high of $41.56 on July 16.

By last week, the company had repurchased about half the shares authorized in the 1996 plan, spokeswoman Laura Asman said.

Coca-Cola Enterprises’ shares closed at $28.75 on Monday on the New York Stock Exchange.