Friday, November 11, 2005

Mark Hulbert: The significance of the surge in buyback announcements - Financial - Financial Services - Markets/Exchanges - Market News

It is good news that INTC and many others are buying back stock at this stage of the business cycle. The part about buybacks that is counter intuitive is that they mean the company cannot find profitable expansion opportunities. The good part is that by choosing to buy back stock rather than to try to barge in on another firms business, the firms do indeed tend to raise returns per share for existing shareholders.

The most famous example of choosing not to expand is Warren Buffet's decision in regard to Berkshire Hathaway. This textile firm was a cash cow when Buffet took over. His competitors invested heavily in new plant and equipment but Buffet saw that the returns on new investment were not going to be great. He cut costs and even cut product lines when they earned less than his target. Over a number of years, he gradually liquidated the business but he took out huge amounts of cash along the way. As most folks know, he invested that cash very profitably in other areas.

INTC is not a dying textile mill. On the other hand, the world of consumer electronics has changed. The public is buying and will buy hand held or pocket sized computers in the form of cell phones and PDA's. There are going to be "desk top" style computers all over the place (for example, I expect every hotel room in the country to have terminals in a few years). The difference is that many of these computers are going to be primarily internet terminals. Those who use "old style" software in lieu of internet based applications may carry a memory device with them that can be plugged into any desktop anywhere to make it ones "personal" computer.

It is already amazing at how storage space and costs have shrunk. One can now carry more information on a Scan Disk memory stick, the size of a lipstick, than what I could hold on my first 5 computers combined.

The bottom line is that the cost of computing continues to drop. This makes it more difficult for companies like INTC to find attractive expansion alternatives. It is a tribute to management that they have announce a huge buy back program; $25 Billion of stock! This buy back puts 2005 over the top as the biggest year ever for technology stock buy backs. The peak being passed is all the way back to 1990. If you bought technology stocks in 1990, your account bobbed and weaved for a while but your ten year compounded returns were SWEET! BUY THE BULL!