Are Adobe and TIBCO Wasting Your Money?
Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
Today, we'll find a few companies that announced new or expanded stock buyback programs, then consult Motley Fool CAPS to see which of those firms the 180,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, maybe Fools should take notice.
Here are two of the latest companies to announce share repurchase programs over the last month:
CAPS Rating (out of 5)
New or Expanded
|Adobe (NAS: ADBE)||***||$2 billion||New|
|TIBCO Software (NAS: TIBX)||****||$300 million||New|
But don't forget, Fools -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use this list as a reason to buy by itself; rather, use it as a launching pad for additional research.
Key to growth
Transitions to new models are always tricky, but Adobe is weathering the change to a cloud-based subscription service fairly well so far, though early digital media sales data indicate steep declines compared to the year-ago period. While part of that may be due to the upcoming release of Creative Suite 6 -- purchasers are holding out for the newest version -- getting a handle on going to the cloud could be challenging it too.
The world of physical software will quickly become a distant memory as downloading form the cloud takes precedence. Microsoft (NAS: MSFT) is following a similar path with its Office suite of products and Google (NAS: GOOG) has long offered free tools via the cloud. But as Adobe maneuvers to the news landscape, its previous licensing model will take a hit and it might not be a one-to-one trade-off until it's grown some moss under it.
And CAPS member ironhide196 doesn't see a smooth transition for Adobe in the process, believing it will experience tumult as its dominance is diminished:
Adobe is losing the battle with their proprietary software for advertising. Yes people will still use their other software, it's not going away but with a market becoming more focused on mobile with HTML5 JQ and CSS3 their domination of the web is coming to an end. Unless there is some crazy innovation shrouded from the world.
Add the flash player to your watchlist and let me know in the comments section below or on the Adobe CAPS page if this buyback makes sense when it still doesn't pay a dividend.
Indebted to whom?
I've never been a big admirer of companies that take on debt to buy back their stock. It was all the rage a few years ago when Microsoft, Dell, and Home Depot all went into hock to repurchase shares. While there was some sense to it -- debt was (and is) cheap -- when there is a horde of cash sitting in the bank, there can even be tax benefits from taking on debt.
The problems arise when this mind-set trickles down to less financially secure companies and they succumb to the temptation to take on debt too. Facing pressure from shareholders to "return value," these riskier businesses will lard their balance sheets with debt making it harder for them to maneuver should that dreaded double-dip recession materialize.
I wouldn't put TIBCO Software among the riskier set, but whatever value was found in the announcement that it was buying back $300 million worth of stock was slightly diminished when it was going to take on $500 million in debt and use part of the proceeds to repurchase $150 million worth of stock. Since it's using another $150 million to pay back outstanding balances on its revolving credit line, does that make it a wash?
With 94% of CAPS members rating the software shop thinking it will outperform the broad market averages, it seems they're willing to overlook the increase in debt. Relying upon its ability to grow revenues and earnings all the while stealing share from Oracle and Microsoft, it's likely TIBCO is betting these moves will pay for themselves down the road.
What's your view on companies adding debt to buy back stock? Are they robbing Peter to pay Paul, or is it a smart way to structure the business? Tell me in the comments section below, then add TIBCO to the Fool's free portfolio tracker to see if it makes good on its promises.
At the time this article was published Fool contributorRich Dupreyowns shares of Oracle, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Oracle, Google, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of TIBCO Software, Adobe Systems, Google, The Home Depot, and Microsoft.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Adobe Systems, creating a bull call spread position in Microsoft, and writing covered calls on Dell. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.