IT investors eye buybacks, earnings

As the U.S. financial services crisis roiled markets around the world, stock buybacks from bellwethers Microsoft and HP and earnings reports from Red Hat and RIM caught the eye of IT investors.

Traditionally, companies buy their own stock to show confidence in future earnings and bolster their share prices. Though Microsoft and HP have shown strong earnings over the past year, general lack of confidence in the economy has forced down the share price of both companies since last year. Microsoft's buyback announcement this week garnered more attention because its cost, at US$40 billion spread over five years, was bigger than HP's $8 billion, and because of what it suggests about the company's fortunes.

Microsoft's share price has been a sore subject for years. "We believe Microsoft management is bewildered why the stock trades at 11.5 times earnings," said Citigroup analyst Brent Thill in a research note. In comparison, Dell and Oracle trade at about 20 times earnings and Web archrival Google is trading at about 30 times earnings.

Microsoft's expected revenue of $67.4 billion this year dwarfs Google's $16.5 billion. But investors appear to be betting that Google is better-positioned than Microsoft to piggyback on the growth of Web advertising and software as a service.

Microsoft's buyback plan was also sweetened by the company's decision to raise its quarterly dividend by $0.02 per share, or 18 percent, to $0.13. In a week where tech-company share prices were whiplashed by the collapse of U.S. investment banks and angst over whether tight credit will hit IT budgets, Microsoft's share price rose steadily from its opening at $25.15 Monday to $26.61 Thursday.

Stock buybacks boost a company's share price by reducing the number of shares on the market, thus raising the value of each share. And when a company lays billion of dollars on the line to buy its own shares, it's seen as a big bet on its own future, sending a signal of confidence to investors.

Buybacks are not always seen as a good thing for all investors, though. An all-at-once buyback, for example, can arouse suspicions that a company is succumbing to pressure for a quick fix to the short-term needs of a few large investors, or even company insiders.

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