A Boost from the Buyback Binge?

By Michael Kaye, CFA Think of it as Corporate America eating its own cooking. Stock buybacks -- when companies repurchase their own shares on the open market -- are reaching record levels. According to Standard & Poor's, repurchase among companies in the S&P 500 index soared 91% during the first quarter of 2005, and by 64% for the 12 months ended Mar. 31.

Buybacks have long been considered a positive sign for investors because they indicate that a company's management feels its stock is attractively priced. But the recent surge appears to be related to other factors as well. For example, S&P cites companies' need for shares to cover an increase in exercised employee stock options.

Another reason: A desire by many businesses to reduce their number of shares outstanding. A reduced share count directly benefits existing shareholders, notes S&P equity market analyst Howard Silverblatt. "The reduction in shares outstanding increases equity holdings of existing holders and boosts earnings per share." In truth, a company's EPS could increase even if overall earnings were flat as profits are divvied up among fewer shares.

BIG BUYERS. For the remainder of 2005, S&P expects buyback activity to continue. Given the need to satisfy outstanding stock options, the desire to boost EPS, companies' enormous cash reserves, and the growing attention by investors to value returned, 2005 buybacks are expected to significantly outpace 2004 and easily exceed actual 2005 dividend payments, says Silverblatt.

So, who's doing the most buying? That's what we set out to uncover in the this week's screen. We looked in the S&P 500 for those companies that have had bought back the largest percentage of their shares outstanding over the past year. Our search turned up six names:

Big Bets on Buybacks



Clear Channel Communications




Cooper Tire & Rubber


First Data


Limited Brands


TXU Corp.


Kaye, an analyst for Standard & Poor's Portfolio Services, is the author of the forthcoming book The Standard & Poor's Guide to Selecting Stocks

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