As the U.S. economy slowly emerges from its prolonged winter, many companies in the wireless sector are wondering what to do with the extra cash they’ve suddenly found. For some of the industry’s largest players, the answer is to buy back some of their own shares.
Nokia Corp., Motorola Inc., Qualcomm Inc. and Texas Instruments Inc. are among those in the wireless industry conducting share buyback programs. Such programs reduce the number of a company’s shares, thereby increasing the value of each share. Companies can use share buybacks for a range of reasons, from protecting against diluting their stock to indicating their financial health.
“It’s a better market today,” remarked John Bright of investment banking firm Avondale Partners L.L.C. As the market improves, he said, more companies could institute share buyback programs.
Motorola re-cently announced plans to buy back $4 billion in shares, news that coincides with the company’s strengthening financial position. Indeed, Motorola’s strong second quarter contributed to it ending the period with a total of $7.5 billion in cash and cash equivalents.
Qualcomm too is in the midst of a share buyback, having spent close to $1 billion to repurchase 27.1 million shares during the past three quarters. The company’s war chest totals $7.9 billion. And Nokia continues to work on its share buyback program instituted last year. In the second quarter, Nokia repurchased 41 million shares for $666 million.
Share buybacks are one of a number of financial strategies for companies with excess cash on hand.
“It’s a strategic decision on how they use their capital,” said Avondale Partners’ Bright.
Surplus cash can be used in a variety of ways-to pay down debt, pay out dividends to shareholders or to reinvest in the business. Putting the money back into the business can include developing new products or conducting acquisitions.
Companies can select such strategies based on their market positions or financial wherewithal. For example, utility companies typically issue regular dividends because they have few growth prospects and therefore don’t need to reinvest in their businesses. For its part, Motorola said its war chest is such that it can simultaneously buy back shares, invest in its business, pay dividends and retire debt.
A stock buyback generally indicates a company is on sound financial and strategic footing. Stock buybacks in the wireless industry appear to be especially appealing because companies are finding themselves with wads of excess cash and relatively low stock prices.
