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A Modest Rebound in Stock Buybacks


Analyst Note: Buybacks rebound 44%; Financial dilution increase 25%

S&P 500 buybacks rebounded 44% ($34.85B) from their record Q2 low ($24.20B; data series starts in Q1,’98)

Information Technology increases 121.5% ($10.54B from $4.76B), but remains 52.1% below Q3,’08 ($21.97B); sector accounts for largest share (30.23%)

Consumer Staples picks up 66.9% ($6.70B from $4.01B; down 45.02% from $12.18B Q3,’08); increasing dividends (best, most consistent sector this year), only sector to have a positive total return from the Oct,’07 high

Energy declines 15.4% ($4.52B from $5.34B); ex-XOM ($4.23B for the quarter) the sector expenditure was minor

195 issues did buybacks in Q3, up 15.4% from the 169 in Q2,’09, and on par with the 193 in Q3,’08

For the second quarter in a row, none of the issues made the top 20 historical list for largest stock buybacks

As the market continued to recover in the third quarter, companies scaled up their buybacks from their anemic levels, but still maintained low levels as cash-conscious corporate strategists maintained a close watch, and grip, on expenditures.

There has been a pick-up in new buyback programs over the last two months. These are authorizations from the Board to management, and are not actual buys. Some of the authorizations are replacing expiring programs or ones that have reached their limits, so investors need to monitor which ones represent a corporate commitment to share repurchasing.

Most companies still appear to be matching their buybacks with their option expiration in order to limit EPS dilution.Diluted shares used for EPS calculations in the Financial sector increased 25.2% for the period, causing the index to increase 4.5% (ex-Financial S&P 500 count that was flat); and that is before the BAC offering, WFC or C. It’s Déjà vu all over again, but this time in reverse. Two years ago I was reminding analysts to adjust their EPS estimates upwards as share counts decreased, now they need to decrease them to reflect the shareholder dilution.

I expect buybacks to increase in the Q4,’09 period in the 10% range; 2010 is dependant on the expiring option schedule (I need to wait for the 10Ks for the details) as well as the recovering economy. As a placeholder, I am using a 25.8% increase in 2010 buyback expenditures, putting it in the $161B area, or 22.8% under the $209B 2010 dividend estimate.

Capital Expenditures were flat for the Q3 over Q2, but down 25.17% for the Q3,’09 over Q3,’08; adding in an estimated Q4 +9.2% gain (over Q3), the full year looks like a 21.9% decline with the initial estimated 2010 rebounding close to 2008 level. An accelerated depreciation schedule from Congress would help, but that has not been incorporated in the initial 2010 estimate.

Cash for the S&P Industrials (Old) easily set a new record, up 8.6% for the quarter, and up 29% from Q3,’08. Information Technology has 16% of its market value in cash, and Health Care has 17%. Q3 may be the short-term peak as consummated M&A deals start to have an impact, resulting in an estimated Q4 decline of 5%-7%. 2010 depends on how good management feels about their corporate future.

Over the past 20 quarters, since the buyback boom began in Q4 2004 (through Q3 2009):

Operating earnings: $3.17 Trillion

As Reported earnings: $2.54 Trillion

Capital Expenditures: $2.24 Trillion

Buybacks: $1.87 Trillion

Dividends: $1.12 Trillion


Steve Ballmer, Power Forward
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