Stock buybacks do have a downside for shareholders

NEW YORK — Stock buybacks are all the rage these days. Companies are on a record-setting pace in announcing share repurchases this year and they are out in force touting all the benefits that investors will get from them.

Buybacks may sound like a great deal — but they don’t always boost shareholder value, as they promise. Often, companies can shell out cash to repurchase stock and end up losing money in the process.

Consider Lexmark International Inc.: This year, the printer company has bought back 12.6 million shares in 2005 at a total cost of $867 million. That breaks down to an average price of $68.83 a share.

The stock is now trading at $43 a piece, however, so those purchases apparently weren’t a deal for the company and failed to do much to boost shareholder value, at least through this round of share repurchases.

Many companies are working hard to convince the investing public that buybacks are the best use of the cash they’ve accumulated on their corporate balance sheets. They usually give the stock a quick boost and they leave fewer shares outstanding, which means each remaining share counts for a greater piece of the corporate pie.

Buybacks for companies in the Standard & Poor’s 500 stock index are expected to easily exceed the highs of 2004, when repurchases totaled $197 billion. This year, there were $163 billion in buybacks in the first half of the year, and the pace remains strong, according to S&P.

Just look at the recent news coming from beleaguered Time Warner Inc., which said it would more than double its repurchase plan from $5 billion to $12.5 billion to meet shareholder demands to lift its slumping stock price.

Youth apparel retailer American Eagle Outfitters Inc. has also increased its buyback plans, as has computer giant International Business Machines Corp. Wireless technology developer Qualcomm Inc. is launching a new $2.5 billion repurchase plan and Xerox Corp. plans to repurchase up to $500 million in common stock — its first buyback program in about eight years.

But there are plenty of downsides to buybacks. Companies can use them to mask a slowdown in earnings growth. Or they can take on massive debt to pay for their repurchases. Often, the corporate dollars that go toward buybacks could be better spent somewhere else.

Given the corporate spin about boosting shareholder value, if companies really wanted to do that, they would be more generous by doling out dividends that put money directly in investors’ pockets.