Yahoo today became the latest in a line of large, high-profile technology companies planning to buy back shares of their own stock, a move that could bring renewed questions about why the firms don’t use their cash to provide stock dividends to shareholders instead.
The Internet giant joined the pack today, saying its board had agreed to buy up to US$3 billion worth of stock in the next five years. Also today, ATI Technologies announced a plan to repurchase up to 10 percent of its outstanding shares. Just yesterday, Applied Materials said it would buy back as much as $4 billion of its shares. All three companies saw their stocks rise in response.
Action Sparks Speculation
Other tech firms with buyback plans ongoing or on the drawing board include Microsoft, Dell, Cisco Systems and Qualcomm.
“This stock repurchase program demonstrates the confidence we have in our company and shows our commitment to deliver long-term shareholder value,” Yahoo CEO Terry Semel said in a statement. “The cash productivity of our business model enables us to actively invest cash in areas that we believe will drive future value for shareholders, such as stock repurchases.”
The move sparked immediate speculation about possible shifts in Yahoo’s longer-range business strategy. By saying it was willing to spend about three-fourths of its cash backlog on the stock re-purchase program, was the Internet giant signaling it did not expect a need for the cash for acquisition? Or is Yahoo expecting profits to slow and seeking a sure-fire way to keep per-share earnings high by reducing the amount of stock on the open market?
The new program dwarfs an earlier stock buyback in which Yahoo repurchased 38 million shares of its stock for around $325 million, with about half of those purchases coming during the fourth quarter of 2004.
Timing Is Everything
In the bigger picture, the buyback is a reminder of the overall struggles of the Nasdaq, which has lost 10 percent since the start of 2005, and raises questions about whether more large tech firms with deep pockets full of cash should begin paying dividends instead of buying the stock directly.
Dividends were almost unheard of among new-line tech stocks until recently. Because the shares were growing so rapidly in value, there was little need seen for dividends to keep investors interested in those shares.
However, Microsoft last year began paying dividends, a move that might have changed that image for many investors. In doing so, some analysts say, Microsoft changed the equation for tech investors by putting dividends on the table. The newly passed tax exemptions for such dividends also help make them more appealing.
And, with another rapid rise in Internet stock values widely seen as unlikely, dividends can be a way to enhance a stock’s perceived value, University of Louisville professor of finance Russ Ray told the E-Commerce Times.
“Investors look for dividends when the company’s share value isn’t going up as rapidly as it once did,” Ray said. “That’s certainly the case with many tech stocks” some of which have even lost value in recent quarters, despite strong performances. Still, Microsoft has not seen its shares rise much since announcing its dividend program.
Dividends are most appropriate when a company expects less growth, which is often one reason companies avoid them. “It can be seen as sending a message that a company is maturing,” Ray said, something tech firms might not want to publicly acknowledge.
Not that dividends are unheard of among tech companies. IBM has long paid dividends to its investors, as has fellow tech bellwhether IBM.
The Yahoo buyback is large by Web firm standards but is overshadowed by other tech buybacks. Microsoft has said it would seek to re-purchase up to $30 billion of its own stock and Cisco has approved a total of $35 billion worth of buyback programs.
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