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Sep 24

Stock buybacks are surging again

Posted by Stephen Taub in Standard & Poor'sCashbuyback

Stephen Taub

Buybacks are back.

In the second quarter, share purchases surged 220.9 percent to $77.64 billion from the record low $24.2 billion registered during the second quarter of 2009, according to Standard & Poor's.

The $77.64 billion also represents a 40.5 percent improvement over the first quarter of 2010, and marks the fourth straight quarter that S&P 500 companies have increased their stock buyback activity.  

"We have effectively moved from a period when companies were reluctant to touch their stock (Q2 2009), to a point where companies are now protecting EPS dilution via share count reduction," says Howard Silverblatt, Senior Index Analyst at S&P Indices.

More companies have embraced this move. Altogether, 257 issues participated in stock buyback programs during the second quarter, up from 251 in the first quarter of this year and 214 that participated in the fourth quarter of 2009.

To be sure, 20 issues accounted for 50.3 percent of the buyback activity, down from 59.8 percent in the first quarter. Additionally, for the fifth quarter in a row, none of the issues made the top 20 historical list for largest stock buybacks.

Why do companies repurchase their shares? For one thing, it mathematically raises the earnings per share, which in turn generally pushes up stock prices just to maintain the same P/E level.

In fact, if you look at the 100 largest companies in the US, about one-third of their EPS growth between 2003 and 2008 came from share buybacks, Carsten Stendevad, head of Citi's Financial Strategy Group, told Time magazine earlier this year.

Companies also institute buybacks to offset the dilutive effects of stock options that are exercised as part of executive compensation packages.

In addition, companies have the money. Silverblatt told Barron's second-quarter cash and equivalents for the "old" S&P industrials posted their seventh consecutive record quarter, jumping to $842.5 billion from $836.8 billion in the first. The cash total represented 11.6 percent of current market value, 75.6 weeks of 2010 estimated operating income, five times annual dividend payments and 4.4 times the past 12 months' worth of stock buybacks, he told the paper.

Meanwhile record low interest rates are fueling a borrowing binge among companies. And many of them are using the money to buy back stock and pay dividends.

In fact, many companies prefer buybacks over dividends because they don't result in a taxable event for shareholders.

Also, buybacks are easy to suspend. The market does not generally penalize companies that halt buyback programs. But they heavily punish companies that cut their dividends.

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