Posted by: Howard Silverblatt on December 11, 2008
S&P just released their third quarter buyback numbers (chick for release),and buybacks in the S&P 500 declined 48% in the third quarter. The value was slightly up from the prior quarter, but the headlines are all focusing in on the year-over-year 48% decline. I prefer to focus in on the actual and future expenditures. And while the $89 billion Q3 value is significantly less than $172 from the record setting Q3 2007, it is still 43% more than dividends and for the first time in S&P history, buybacks are more than the actual GAAP earnings. You read correctly - buybacks were $89.7 billion, which is more than the $86.6 billion in earnings, and more than the $61.4 billion in dividends.
When earnings were posting double-digit gains, buybacks were viewed as a legitimate use of excess cash to return value to shareholders, as well as increase EPS and support stock price. And while cash levels remain near their all time high, earnings and stock prices have deteriorated, with the comparison of buybacks to earnings becoming very noticeable. Price volatility, due to the uncertainty of the economic climate has shot up. There have been the same number of 5% day moves in the last 60 trading days as there has been in the prior 50 years. On the short-run buybacks support stock price, but no company can fight the market. Over the long run buybacks may add value, but companies need to be able to support the buybacks, and financing has gotten a bit more difficult of late; which means the money has to be internally generated, with the understanding that once repurchased the shares will not be as liquid as the cash that was used to buy them was.
I expect this quarter to show a decline in buybacks, as companies resort their priorities based on the current earnings and liquidity forecasts. Investors need to keep an eye on the expenditure to insure that any short-term gain is not at the expense of long-term growth.