Companies Are Back In The Share Buyback Mode

Posted by: Howard Silverblatt on June 24, 2010

I just released the first quarter S&P 500 buyback numbers and at first look the numbers are impressive. Q1 increased 80% over last year’s Q1 expenditures and 16% over the previous Q4. More companies did buybacks this quarter, and companies made a point of telling investors that they were doing them, just as they made a point of telling them that they had stopped doing them a year or so ago. So what did they do?

What they did was buy back $55 billion in stock, up from $48 billion last quarter and significantly up from the $31 billion they spent in Q1 2009. However, two-and-half years ago that expenditure was three times as large, at $172 billion, and we were seeing the impact of those buybacks in lower share counts, which in turn increased the earnings per share. And outside of an offer, there are few things that increase a stock price like higher earnings. We are seeing very little share count reduction this quarter and therefore no significant positive impact on EPS. Companies appear to be buying just enough shares to satisfy their employee options, and therefore negate any earnings dilution that would occur from new shares being issued. This is the traditional use of buybacks, not share count reduction. I found that half the issues in the S&P 500 did stock buybacks, up from 214 issues in the prior quarter and up from 194 in Q1 2009. However I also found that 316 issues increased their diluted share count, therefore reducing their earnings per share, which traditionally, is the case. The lack of extra share buying is not a bad sign. Companies remain extremely cautious about the economy, their products, and their cash flow. It is not that they can not buy back more shares, Q1 also posted the largest cash reserve in index history, it is that they choose not to do them.

I believe companies will continue to do buybacks though 2010, spending more on them than dividends. I also believe the exact amount will be dependant upon the market. If the market goes up, more options will be in the money and companies will increase their buying to match. If the market declines, some shares will move out of the money, but given that many of them are solidly in the money, the underlying demand for shares should still continue on.

For the details, see the linked file
SP500_buybacks_2010_q1.doc

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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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