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Awash in corporate stock buybacks

Chris Farrell

TEXT OF INTERVIEW

Scott Jagow: This week, two huge corporations told investors they're buying back stock.ConocoPhillips is retrieving $15 billion worth. Johnson & Johnson, $10 billion. We've seen a lot of this lately. I asked our economics correspondent Chris Farrell why.

Chris Farrell: Well we're living in an era of private equity buying publicly-traded companies, right? Well a stock buyback is a little bit like a private equity deal. What is a company doing? Part of it is a wave of buyers in the market shrinking the supply of public equity. I think it's part of an overall trend. Is it good? Is it bad? It's really hard to know and if you take the stock buybacks and the buyouts together, looks like we're going to get rid of about a trillion dollars worth of stock in 2007. And that's real money.

Jagow: But at the same time, you were telling me that perhaps this is a way for say a CEO to increase his compensation? Because it's based on the stock price?

Farrell: Not that a CEO would ever consider that or take that into consideration . . I mean no, no seriously what we're really talking about is financial engineering. The market's not stupid. You reduce the number of shares and therefore earnings per share, by definition, goes up. But you really haven't changed the fundamentals. This is why we're starting to try and figure out what's the signal that management is giving here. What I think would be the positive signal is not stock buybacks but management saying 'we're increasing our dividends' and here's why: When management increases its dividends — let's say it's paying $1 a share dividend, we're just making up a number — and it says 'we're going to increase that to $1.25' First of all it's cash. You're giving cash to your shareholders and management is making a real commitment and management only raises its dividend payout when it believes it can earn that divided payout because the one thing management never wants to do is cut that dividend payment.

Jagow: So you're suggesting that during this huge wave of corporate profits, that a better way for companies to spend that cash is to increase the dividend instead of buying back the stock?

Farrell: Absolutely. A dividend is an unambiguous signal that management sees better times ahead, it puts cash in the hands of shareholders and then they can go out and invest it. Stock buybacks, ehhh we've got a big debate going on about them, we're a little bit unsure and I think companies are embracing stock buybacks because one, as I've said, I think it improves management's payout and two, because I think management has run out of good ideas.

Jagow: All right Chris Farrell, our economics correspondent, thanks so much.

Farrell: Thanks a lot.

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