Back when the stock market was booming, companies were buying back shares at a record pace -- often taking on debt to do it. Now corporate profits are down, balance sheets are weak -- and companies are putting a halt to share buybacks at the exact time when their stock might just be a good deal.

BusinessWeek reports that "According to Standard & Poor's, companies in the S&P 500 index bought back just $30.8 billion in stock in the first quarter of 2009, down 73% from a year before, even though stocks were arguably unbeatable bargains at the time. In March, the S&P 500 hit its lowest level in more than a decade. "
Buy high, sell low, anyone?

Part of the problem is that companies simply lack the financial flexibility to buy back their shares now. But also, many companies are maintaining their dividends at the expense of share repurchase programs. Cutting a dividend requires a press release and an 8-K filing with the SEC. This can trigger a sell-off as dividend cuts are almost always seen as a sign that the management is worried about the company's balance sheet and adequacy of future cash flows. If you stop buying back stock, no one notices unless they dig through SEC filings.

Differences in the way that dividends and share repurchases are disclosed make it unlikely that dividends will be cast aside in favor of buybacks anytime soon -- even though that's the most rational choice, given the paltry valuations so many companies are now trading at.

The only thing that will change that is institutional investors sending a strong message that they would rather see companies buy back shares than pay dividends. What's disappointing is that, so far, I haven't yet seen one company announce a decision to cut its dividend to take advantage of the beaten down stock market to repurchase its shares.

As Keynes said, it's better to fail conventionally than succeed unconventionally.

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