As hospital companies have seen their stocks take a beating in recent months, several have repurchased shares to boost investor confidence.
In trying to cater to the investment community, however, they have received demerits from major credit-rating agencies. Some equity analysts say the action has merit under certain circumstances, but they question the widespread use of the strategy in the current environment.
"It's supposed to send a message to the investor that says the company could not make any other investment that would give them as good a return as buying back their own shares," says Sheryl Skolnick, a senior healthcare analyst with BancBoston Robertson Stephens in New York. "It's not really dealing with the issues that send the stock down."
In its 1998 earnings report, Columbia/HCA Healthcare Corp., the nation's largest for-profit hospital company, announced its second stock repurchase program in a year -- this time earmarking $1 billion. Immediately after Columbia released the report, Standard & Poor's downgraded the company's credit rating (See chart). Columbia's first repurchase, of 44 million shares, was announced last July and was completed early this year through forward purchase contracts. The second repurchase program was authorized to be completed through either open-market purchases or forward contracts.
Since its first repurchase was announced, Columbia's stock has slid significantly.
To reassure the federal government that Columbia can fund the repurchases and still pay a potential settlement for a federal whistleblower lawsuit, the company signed $1 billion in letters of credit over to the U.S. Justice Department.
Stock repurchases are sometimes necessary to show that company management stands by its decisions, analysts say. But in the current environment of depressed Medicare and managed-care reimbursements and costly year-2000 computer fixes, multiple repurchases may send the wrong signal to employees and investors.
"These are rough times, and sometimes when it gets rough, it's good to be building cash reserves instead of spending everything that comes in," Skolnick says.
"If you're working for Columbia, this is not a strategy that you will rally around. It is difficult to keep good people when there's a lack of vision," says Jeffrey Villwock, healthcare analyst at Robinson-Humphrey Co. in Atlanta.
Columbia's repurchasing strategy seems to be coupled with the spinoff of two of its hospital groups into two new companies, Triad Hospitals and Lifepoint Hospitals.
Villwock says combining share repurchases with a partial liquidation does nothing to reassure Wall Street that a company has a forward-looking strategy for its remaining hospitals.
"They're not saying anything about quality, just about selling assets," he says. "The asset value of the company has actually declined because of the strategy, and yet they continue the strategy."
The credit ratings of companies that announce repurchase programs also suffer, says Elie Radinsky, ratings director at Standard & Poor's. Specifically, Standard & Poor's downgraded Columbia because it announced its two most recent stock buyback programs so close together.
Quorum Health Group, too, was downgraded by Standard & Poor's in late January when it released a disturbing earnings report following the authorization of two stock repurchases.
Quorum's timing of the repurchase program just before the release of the earnings report was a factor in the downgrade, according to a March 12 Standard & Poor's report on hospital companies.
In August, Quorum's board of directors authorized the repurchase of up to 3 million shares of the company's common stock, which the company bought for $48 million. Then in October, the board authorized the repurchase of up to 5 million more shares.
"The use of share repurchases to support stock prices at the expense of bondholders limits a company's financial flexibility and was a factor in the downgrades of Columbia/HCA and Quorum," Radinsky wrote in the Standard & Poor's report about hospital companies.
Still, Standard & Poor's did not downgrade the ratings for HealthSouth Corp., a Birmingham, Ala.-based outpatient surgery and rehabilitation provider, which announced a $1 billion stock repurchase program in February. That's because the company has strong cash flow and is buying back the shares at a reasonable pace, Radinsky wrote.
Stock prices for Columbia and Quorum have not jumped dramatically following the repurchase announcements. But the companies stand by their strategy.
"I think it's something we believe in and something that's good for the company and good for all of our constituencies," says Jeff Prescott, Columbia spokesman. The repurchases are an attempt to bolster stock prices and show that management still believes strongly in the value of the company, he says.
Quorum's management backed away from the strategy after the company was hit with a bad earnings quarter and negative feedback from the ratings agencies, says Steve Hewett, Quorum vice president and chief financial officer. Quorum reported a net loss of $18.7 million for the quarter ended Dec. 31, 1998, compared with a profit of $24.4 million for the year-ago period.
"In our case, after the repurchase of the stock, coupled with the most disappointing financial quarter in our company's history, we have decided not to be active in repurchasing more stock," he says.
In other words, even though management believes the company's stock is undervalued, there are more prudent things to do with the money.
Among prudent activities are showing rating agencies, bankers, bondholders and equity investors that the most recent quarter was an anomaly, Hewett says.
For Quorum and Columbia, depressed stock prices resulted from market pressures combined with litigation. Both companies are in the middle of major federal investigations that investors could view as a risk factor and a long-term cash drain.
Diana Lee, a healthcare sector analyst at Moody's Investors Service, said her agency, like Standard & Poor's, is concerned about the trend of stock repurchases among hospital companies.
The current hospital company repurchase programs rely on financial engineering at the expense of long-term business strategy, Villwock argues.
"It's very interesting on paper," he says, "but it's not real interesting if you're the hospital CEO or one of the employees."