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Qwest Share Buyback Seen As Disappointing Move
By Roger Cheng
Thursday, October 5, 2006

NEW YORK -(Dow Jones)- Qwest Communications International Inc.'s (Q) decision to buy back $2 billion worth of stock represents a timid initial step toward returning value to shareholders.

The move is the latest chapter in the turnaround for a company that was all but written off last year.  Yet investors had expected more -- a regular dividend was the most widely speculated route -- and those expectations drove Qwest shares to a four-year high of $9.22 last month.

More recently, Qwest traded at $8.33, down 37 cents, or 4.3%, on volume of 17.4 million shares.  Average daily volume is 15.1 million shares.

"We sense there could be a knee-jerk reaction suggesting some level of disappointment with the lack of a tangible dividend component," Banc of America analyst David Barden said in a note.

The decision to go with a stock-buyback plan may lead some to speculate on the confidence of its longer-term ability to generate cash.  A buyback program allows Qwest to pick and choose when it will spend the money over a two-year period, while a dividend represents a regular payout to shareholders.

"The plan seems to speak to a high comfort and visibility into cash flow through 2008, but perhaps a hesitation at this stage to commit to distributions beyond this," Barden said.

Qwest spokesman Nick Sweers said the company opted for a buyback partly because it wouldn't have to pay taxes for the program versus dividends.  A buyback also allowed the company to return value in a "prudent and disciplined manner."

Still, the buyback, which represents 12% of its market capitalization, as of Wednesday's closing price, is a step in the right direction toward matching its industry peers.  The phone industry relies on its free cash flow for dividends and stock buybacks to compensate for a deterioration of the fixed-line business.

Assuming Qwest spends $1 billion a year over the next two years on its stock, Barden estimates the company will spend roughly 52% of its free cash flow over the next two years on the program.

The analyst doesn't own a stake in Qwest, but his firm has an investment-banking relationship with the company.

The news contrasts with the company's position more than a year ago.  That's when the company, burdened with heavy debt and continued losses, entered into a bidding war with Verizon Communications  (VZ ) for MCI Inc. -- which it eventually lost.  Since then, Qwest posted its profit for the first time in several years during the first quarter, and Wall Street has grown more comfortable with the company.

Qwest kept the possibility open for further programs to be implemented.  "It is our intention to fully achieve this plan over the next two years, while reviewing, on a regular basis, opportunities to enhance shareholder returns," Chairman and Chief Executive Richard Notebaert said in a statement.

But Bear Stearns  analyst Mike McCormack said a dividend isn't likely to be offered in the near term.  He had expected a combination of a dividend and stock-buyback plan.

"A dividend would have signaled a greater degree of confidence in the long-term sustainability of free cash flow and provided valuation support," he said in a note.

The analyst doesn't own a stake in the company, and Bear Stearns has no investment-banking conflicts to report.

Others, however, are holding out hope for a more aggressive move by Qwest.  "We believe the company will continue to enhance its cash return program over the next 12 months, as management was clear in our meeting earlier this week that it was comfortable it had multiple levers it could pull to further return cash to shareholders," Raymond James analyst Frank Louthan said in a note.

The analyst doesn't own a stake in Qwest, but his firm is seeking an investment-banking relationship with the company.

- By Roger Cheng, Dow Jones Newswires; 201-938-2020;