In an age of sagging media stock prices, companies have been repurchasing their own stock by the bucket, looking to drive up their share price.
Carl Icahn just extracted up to $20 billion in buybacks from Time Warner. Comcast recently authorized a second $5 billion buyback. News Corp. expects to make $3 billion in buybacks this year.
The logic is thus: A company takes its surplus money and makes an offer to shareholders or buys stock from the open market. Shares get absorbed back into the company. By reducing the pool of shares, the company increases the all-important earnings-per-share ratio and, voila, the stock price goes up.
Well, theoretically, anyway.
The truth is that for every buyback benefit, there's a drawback.
First, there's no guarantee they work. Tech companies spend billions on buybacks that just suck up money. Media stocks haven't budged much either since the craze began.
A buyback also can balloon a company's debt, which makes snagging capital for future projects more difficult.
"They're not a panacea by any means," says media observer
Hal Vogel, adding he prefers dividends. "They send a signal that something might be wrong in terms of the growth rate and the company doesn't know what to do with the money."
Of course, a buyback often signals that there aren't many acquisition targets out there.
The problem is that when one eventually emerges, a company might find its cash has slid down, well, bought-back mountain.
Contact the Variety newsroom at
news@variety.com