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Stock Buybacks Retreat 44% in Second Quarter; Cash holdings goes up

Posted by: Howard Silverblatt on September 23, 2008

As uncertainty grew and commitment to significant cash outflows for purchases declined, buybacks pulled back from their record highs. S&P 500 stock buyback activity slowed considerably during Q2,’08, posting its lowest level since Q3,’05. The $87.9 billion in stock buybacks during the second quarter represented a 44.3% decline over the $157.8 billion spent during the second quarter of 2007. The actual dollar level of buybacks however remains at a historically high level, partially due to the need to satisfy stock options. I anticipates that the Q3,’08 period will also show a significant decline in stock buybacks due to the uncertainty in the market, and the comparison to the record $172 billion spent on buybacks during Q3,’07.

On a sector basis, the shift continues. Financial issue buybacks were few and far between, accounting for just 6.6% of the aggregate repurchases, compared to 17.0% in Q2,’07. Additionally, many Financials issued shares and dilutive instruments to shore up liquidity during the quarter. Information Technology continued to increase its expenditures on buybacks and now accounts for 26.2% of all buybacks.

Yesterdays buyback program announcements (MSFT, HPQ, NKE) fit well with the hoped for recovery, but the proof of the pudding will be in the actual trade and that will depend as much on perception as market conditions. I expect buybacks to continue at sufficient levels to prevent option dilution, with additional purchases being dependant on the issuer’s market perception

Q2 buybacks off 44.3%, at $87.9B vs. $157.8B for Q2,’07, but still 41.9% higher than dividends ($61.9B)
Operating earnings $148.4B vs $213.7B (-30.5%)
As Reported earnings $114.8B vs $194.3B (-40.9%)
Dividends $61.9 vs. $59.4B (+4.2%)
Capital Expenditures $130.7B vs. $112.7B (+15.9%)

Financials continued to add shares and dilutive instruments
IT pullback less severe, partially due to option coverage; account for 26.2% of index buybacks
Cash levels for the S&P 500 Industrials (Old) increased to their highest level ever
XOM still the poster child for buybacks and SCR (Share Count Reduction) - 32 quarters in a row, since Q3 2000
Since the buyback boom in Q4,’04, S&P 500 issues have spent approximately $1.64 trillion on stock buybacks compared to $1.73 trillion on Capital Expenditures and $845 billion on dividends.

06/30/2008 $87.91
03/31/2008 $113.90
12/31/2007 $141.71
09/30/2007 $171.95
06/30/2007 $157.76
03/31/2007 $117.70
12/31/2006 $105.18
09/30/2006 $109.81
06/30/2006 $116.66
03/31/2006 $100.18
12/31/2005 $104.28
09/30/2005 $81.47
06/30/2005 $81.42
03/31/2005 $82.05
12/31/2004 $66.42
09/30/2004 $45.68
06/30/2004 $42.46

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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