A Big Slowdown in Stock Buybacks

Buybacks dropped in the second quarter, and market uncertainty means third-quarter buybacks may fall farther still

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by Howard Silverblatt From Standard & Poor's Equity Research

While high-profile U.S. companies like Microsoft (MSFT), Hewlett-Packard (HPQ), and Nike (NKE) have boosted their stock buyback plans in recent days amid elevated stock-market volatility, repurchase activity actually slowed considerably in the most recent quarter.

Based on preliminary results of analysis conducted by Standard & Poor's Index Services, stock buyback activity for companies in the large-cap S&P 500 index eased at a significant pace during the second quarter of 2008, posting its lowest level since the third quarter of 2005. The analysis showed that S&P 500 companies are set to post $87.9 billion in stock buybacks during the second quarter, representing a 44.3% decline from the $157.8 billion spent during the second quarter of 2007.

Buybacks entered a different stage during the second quarter, as uncertainty grew and commitment to substantial cash outflows for purchases declined. The dollar level of buybacks, however, remains at historic highs partially because of the need to satisfy stock options.

Standard & Poor's anticipates that the third quarter of 2008 will also show a big decline in stock buybacks because of uncertainty in the market, expecially when comparing it with the record $172 billion spent on repurchases during the third quarter of 2007.

Infotech Repurchases Are Up

Recent market events have spurred several large buyback program announcements, and as a result, S&P expects the amounts that companies have authorized for their repurchase plans to increase. However, the amount that companies actually spend to buy back stock under those authorizations will depend on stock market conditions, but more importantly on their perception of their perception of business conditions in the coming periods.

On a sector basis, S&P notes a continuing shift in buyback participation. Financial companies continued to shy away from stock buybacks during the second quarter of this year, accounting for just 6.58% of the aggregate repurchases. As a matter of fact, many financial firms went in the opposite direction during the quarter, issuing common shares and other securities to shore up their liquidity.

Conversely, the Information Technology sector continued to increase its expenditures on repurchases (after slowing for prior periods), and now accounts for 26.23% of all buybacks.

Since the buyback boom began during the fourth quarter of 2004, S&P 500 companies have spent approximately $1.64 trillion on stock buybacks, compared with $1.73 trillion on capital expenditures and $845 billion on dividends.

See the accompanying slide show for a look at the 25 S&P 500 companies that have bought back the largest dollar amount of stock since the fourth quarter of 2004.

Howard Silverblatt is Standard & Poor's senior index analyst for its Index Services unit. In addition to general market research and commentary, he is responsible for the statistical analysis of Standard & Poor's family of U.S. indices -- including the world's most recognized index, the S&P 500.

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