Stock buybacks cause setbacks

Bar graph representing a market crash.

TEXT OF STORY

Kai Ryssdal: Tokyo's Nikkei stock index wrapped up trading for the year today, down 42 percent. We're going to have to wait another day to get 2008 totals from Wall Street. But pretty it won't be. The year's losses on the stock market are bad enough for companies and their investors. But there's an extra downside for some firms that bought back a lot of their own stock.

Marketplace's Mitchell Hartman explains.


Mitchell Hartman: Macy's, The New York Times, Gannett, Home Depot. They're among a long list of companies that went on a stock buy-back spree in the past few years, in an effort to drive up their earnings per share and their stock price.

Nick Riccio: What seemed like a good idea a couple years ago may not seem like one today.

Nick Riccio is managing director of corporate ratings at Standard & Poor's. He says many companies financed their buy-backs with borrowed money. Now, they have to pay off that long-term debt, at a time when they're not making much, and additional credit's hard to come by.

Riccio: We don't get too carried away if companies live within their means. If they're generating excess cash and they use that to buy back stock, they're not levering up, they're not really impeding their future cash flow at all. But when you start borrowing money for that, I think you kind of compound the risk level.

That risk is reflected in the companies' credit ratings, many of them at or near junk-bond grade. University of Portland finance professor Richard Gritta says there's not much light at the end of the tunnel.

Richard Gritta: You could sell new stock, and use that new stock to extinguish some of the debt. But the problem is, the stock prices are hitting rock bottom.

Gritta predicts it'll take these companies years to sell investors enough stock, or consumers enough stuff, to get out of the financial hole they're in.

I'm Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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