Once it's done buying Time Warner Cable, Comcast Corp. plans to authorize an additional $10 billion -- beyond the several billion dollars it's already planning -- to buy back its own shares on the stock market. Apple Computer boss Tim Cook said recently that his company plans to spend an extra $30 billion doing the same thing, boosting Apple's total announced share buybacks to $90 billion.
How can they afford, why do they choose, to pump all that cash into their own stock -- like the proverbial snake eating its own tail? How can they afford to, after funding multibillion-dollar acquisitions, system upgrades, research, marketing projects, share dividends?
"It's a strategy question: You're bringing in all this cash; what do you do with it?" says Robert Costello, president of Costello Asset Management in Huntingdon Valley, which invests $80 million for clients.
Buybacks prop up share prices and help prevent fat stock option grants to corporate executives from "diluting" the value of other investors' shares, Costello said. And at recent prices, shares of companies like Apple and Comcast, valuable as they are, are "not expensive," compared to their profits, he argued.
Both companies have been active acquirers of other businesses, but "they can't keep buying everyone they don't own," Costello told me. Why not invest in creating new business lines, then? "Not too many companies, at that size, are going to build new businesses from scratch," since that would depress their profitability and make them less attractive to investors, he said.
"A boatload of cash is a good problem to have," Costello said. But aren't high gross and net profits proof that companies selling basic goods and services -- like Internet access and smartphones -- are uncompetitive, and are charging higher profits than a free market should support?