Last year’s race was between commodities to see which would hit $4 a gallon first – milk or gas. Milk won, and is still over $4 a gallon, but while gas is down it’s making a comeback and is up 66% year to date - it’s not over till it’s over.
This year’s race was between buybacks and dividends; for a few days it looked like executive pay might join the race, but it didn’t. Dividends payments were down 18% in the first quarter and I expect the second quarter to be down 20%, with no improvement until ‘sometime’ in 2010. Buybacks, which had easily outspent dividends for the past four and half years, and peaked in Q3 2007 at almost three times more than dividends, have fallen off 82% from that mark, with the Q1 2009 expenditure of $31 billion down 72% from the Q1 2008 expenditure of $114 billion. And the numbers are actually worse than they first appear. First, Exxon Mobil, the poster child for buybacks with 35 consecutive quarters of share count reduction, accounted for over 25% of the total Q1 buybacks – it’s always good to have money. Second, many companies only made token purchases, which were most likely used to cover options or prior agreements. And third, 83 of the issues that repurchased shares during the fourth quarter of 2008 didn’t buy any shares in the first quarter of 2009.
What’s happening here is that the need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks too high risk for most corporations. While companies may want to buy back shares to support their stock and increase EPS, their priority is insure that they have enough resources to run the business, just in case the recovery is delayed a bit.
I expect buybacks to remain weak for the foreseeable future, even as earnings improve. Buybacks are now well behind dividends in corporate priorities, and dividends are declining. The reality of buybacks is that are gone as we knew them, at least until the bad memories fade from our minds and portfolios.
For more details see my buyback release chick here
P.S. - Without buybacks supporting stocks it’s going to be hard to gain that 60.2% advance needed to break even for the decade