February 3, 2005
It's reassuring when companies listen. You can count telecom equipment maker Tellabs (Nasdaq: TLAB ) among those that do.
Last week, I suggested that Tellabs could make better use of its assets by forking some of its cash hoard over to shareholders through a buyback. Well, lo and behold, the group announced last night that it plans to repurchase up to $300 million worth of its shares -- nearly 10% of its market capitalization.
Tellabs is sitting on about $1.1 billion in cash and liquid securities -- roughly 30% of its total assets and market value. The company has zero long-term debt. At the same time, Tellabs shareholders have had a rough year: The stock has dropped about 20%, to the $7 range, since the start of January. The timing is right for Tellabs to share its wealth buildup with shareholders.
Companies can find it awfully tempting to cling to their spare cash, like Microsoft (Nasdaq: MSFT ) did for so long. Executives will tell you that it gives them extra flexibility and speed to make acquisitions when they see fit. But, just as easily, they can fritter away cash on wasteful acquisitions and bad projects designed to boost their personal power and prestige. So Tellabs' buyback is admirable, especially for a technology company facing a tough market outlook.
The big question is whether investors will return the favor and start putting more money back into the company. They may not. The buyback hints that investors are still uneasy about the prospects of the underlying business. Sure, today's news of the cash return lifted the shares, but only by 2.5%. When a big buyback has so little impact, it's a sign the market is worried. Tellabs should keep listening.
Want to read more about stock buybacks? Check out Zeke Ashton's "Buybacks: The Invisible Yield."
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.