Companies Invest In Themselves

3/6/2017


Share repurchases have declined in recent quarters but remain elevated compared to historical norms. Stock buybacks for S&P 500 Index companies totaled $112.2 billion in the third quarter, down 12% from the second quarter and 25% below the same period last year. Fourth-quarter data is not complete; share repurchases are running 14% ahead of the third quarter but 16% lower than the same quarter in 2015, says Howard Silverblatt, senior index analyst at Standard & Poor's. S&P 500 stock buybacks have averaged $99.59 billion per quarter since December 2003.

After surging 22% over the past year, the S&P 500 Index sits near an all-time high, bringing into question the wisdom of stock buybacks. But there is evidence that companies exhibit some restraint on stock buybacks at times of elevated valuations.

We conducted a study that separated the past 52 quarters (dating back to the fourth quarter of 2003) into quintiles based on trailing P/E ratio for the average S&P 500 stock. We found that S&P 500 share repurchases tend to contract when stock valuations are richest. Unfortunately, companies are typically even more cautious when valuations are lowest, causing them to miss out on the biggest bargains. See the table below for more details.

Missing out on the best bargains
We separated the past 52 quarters, stretching from the fourth quarter of 2003 to the third quarter of 2016, into quintiles based on trailing P/E ratio for the average S&P 500 stock. Companies have historically curtailed stock buybacks when stock valuations are at their highest. But they tend to spend even less when valuations are at their lowest.
Quintile
Average
Spent On
Buybacks
($Billions)
Average
Spent On
Buybacks
($Billions)
P/E Ratio
Range
Quintile 1
101.8
22.2
21.5 to 23.7
Quintile 2
107.1
20.9
20.6 to 21.4
Quintile 3
124.4
20.2
19.9 to 20.5
Quintile 4
89.4
19.0
17.8 to 19.7
Quintile 5
74.8
15.9
11.4 to 17.7

In a separate study, shown below, we parsed the S&P 500 stocks into quintiles based on their one-year change in share count. The quintile of stocks that most aggressively lowered their share count currently averages a trailing P/E of 16 — far lower than any other quintile. It was also the sole quintile where the average stock traded below its own five-year average P/E ratio. Conversely, the quintile of stocks with the largest increase in share count also had the highest average P/E.

Cheapest stocks, biggest buybacks
We separated the S&P 500 into quintiles based on the one-year change in their share count. Stocks that most sharply reduced their share counts tend to have the lowest P/E ratios. They also tend to be more attractively valued relative to their own five-year average P/E. We excluded stocks with P/E ratios above 75 and below 0. All numbers are averages.
Quintile
1-Year
Change
In Share
Count
(%)
Trailing
P/E Ratio
Curr. P/E
Ratio/
5-Year
Average
Quintile 1
(7.1)
16.1
0.98
Quintile 2
(2.9)
20.1
1.05
Quintile 3
(1.0)
23.2
1.13
Quintile 4
0.3
22.9
1.07
Quintile 5
15.7
24.7
1.03

Looking ahead, capital expenditures are projected to rise this year, potentially cutting into stock buybacks. But should the U.S. grant a tax holiday or slash the corporate-tax rate, many companies would see an influx of cash to fund share repurchases.

SHRINKING THE SHARE COUNT
The following recommended stocks used buybacks to reduce outstanding shares by more than 4% in the past year. Shareholder yield equals dividends and share repurchases divided by stock-market value.
12-Month Spending On . . .
12-Month
---- Share Repurchases ----
------- P/E Ratio -------
Company (Price; Ticker)
Dividends
($Millions)
Stock
Buybacks
($Millions)
Dividend
Yield
(%)
Shareholder
Yield
(%)
Share-
Count
Change
(%)
No. Of Shares
Repurchased
(Millions)
Trailing
5-Year
Median
Apple ($140; AAPL)
12,311
7,000
1.6
2.6
(5)
327
16
13
Applied Mat. ($37; AMAT)
437
1,269
1.1
4.3
(6)
60
17
22
Carnival ($57; CCL)
977
2,263
2.5
7.9
(6)
48
16
21
CBS ($67; CBS)
288
3,000
1.1
11.6
(9)
54
16
17
F5 Networks ($145; FFIV)
0
650
0.0
6.9
(6)
6
19
26
FedEx ($197; FDX)
349
1,603
0.8
3.7
(5)
11
17
21
Foot Locker ($76; FL)
111
358
1.6
4.6
(4)
6
16
15
Lear ($144; LEA)
89
659
1.4
7.4
(7)
6
10
10
Southwest Air ($59; LUV)
222
1,800
0.7
0.6
(5)
40
15
17

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com