Companies Buy Back Fewer Shares
When the going gets tough, the smart keep a close eye on their wallets. Not surprisingly, spending on stock buybacks has plummeted over the last year.
Even if the economy largely recovers by mid-2010 — far from a sure thing — it may take several years for buybacks to regain the popularity they had attained just one year ago. In the 12 months ended with their most recent fiscal quarters, the 1,003 companies in the S&P 1500 Index with five years of data on share repurchases combined to spend $59.5 billion on buybacks net of shares issued, down from $427 billion in the same period a year earlier. Buybacks declined in every sector, as shown in the table below.
The picture is likely to get even uglier in the current quarter as the issuance of new shares picks up. U.S.-traded companies issued $64 billion in shares in May, 68% above the previous monthly high, according to TrimTabs Investment Research.
While net buybacks are down, the repurchases do continue. Over the last four quarters, 40% of S&P 1500 Index companies reduced their share count, down from 52% a year earlier. Five years ago, just 19% of the companies lowered their share count, and buybacks had been trending higher for four years before the financial crisis drove many firms to hold onto more of their cash.
Since buybacks reduce shares outstanding and thus boost per-share growth numbers, their appeal is easy to see. Over the last five years, IBM ($107; IBM) repurchased about $48 billion in shares, reducing its share count by 22%. During the same period, Exxon Mobil ($72; XOM) invested nearly $132 billion in its own stock, shrinking the share base by 25%. Over the last five years, Exxon delivered annualized growth of 14% in net income, yet per-share profits rose at a 22% clip. IBM’s per-share profits grew at an annualized rate of 16% during that period, versus 10% growth in net income.
Despite recent weakness, total spending on buybacks remains higher than that seen four or five years ago, though additional declines over the next year are possible. The Exxons and IBMs of the world generate billions of dollars in cash every quarter despite the recession, allowing them to keep buying back shares. But many companies have suspended their share-repurchase plans in recent months and are unlikely to reinstate them until the economy has improved. The sharpest declines occurred in the last quarter, when buybacks fell 86% from a year earlier.
Against the backdrop of a broad-based decline in buybacks, companies that continue to repurchase their own shares are signaling confidence in both their cash flows and the value of their stock. The table below lists 15 companies that have repurchased more shares than they issued in each of the last eight quarters and have not announced plans to stop the buybacks. Three are reviewed in the following paragraphs.
Over the past three years, DirecTV ($22; DTV) has lowered its share count by 25% through aggressive stock buybacks. A strong balance sheet and steady free cash flow have helped DirecTV continue that strategy this year. Through early May, the company had repurchased $438 million in shares as part of a $2 billion buyback program announced in January.
However, a pending merger with Liberty Media Entertainment Group ($24; LMDIA) could temporarily complicate DirecTV’s buyback efforts because of Internal Revenue Service regulations. First, DirecTV must suspend buybacks from the date of the merger proxy mailing until the vote. Second, DirecTV could also face limitations on the number of shares it can repurchase during the 12 months after the merger. Some on Wall Street speculate that DirecTV may make a self-tender offer for $1 billion to $3 billion or more. Regardless, DirecTV is likely to continue buying back shares regularly over the long term. DirecTV is a Focus List Buy and a Long-Term Buy.
Exxon Mobil ($72; XOM) has reduced its share count in each of the last 35 quarters, with shares outstanding down 30% in that time. In recent years, buyback activity has gained momentum, with the share count declining 6.1% in 2007 and 7.5% in 2008. Relative to a dividend, buybacks give Exxon more flexibility. The company can cut back during tough times without facing the angry reaction that often comes with a dividend cut. Exxon spent $7.9 billion on buybacks in the March quarter and anticipates spending at least $5 billion in the June quarter.
The company holds about $25 billion in cash, versus $7 billion in long-term debt. That cash funds not only buybacks and dividends, but also capital projects. Exxon is one of the few energy companies to raise its capital-spending budget for 2009, up 11% to $29 billion.
Exxon shares have rallied 11% from late-April lows as oil prices rose to above $70 a barrel. Exxon chief Rex Tillerson said oil demand remains flat compared to the start of the year, attributing much of the run-up in oil prices to investors anticipating a recovery. Exxon Mobil is a Long-Term Buy.
Microsoft ($23; MSFT) has aggressively repurchased its stock in the past 12 months, spending $13.64 billion and shrinking the share base by 6%. The software giant has trimmed its share count by 18% in the past five years. Given the market’s uncertainty and the company’s interest in acquisitions, Microsoft sharply reduced buybacks in the March and June quarters. But Microsoft says it remains committed to its buyback program — and with cash reserves of more than $25 billion, it has the flexibility to follow through.
Microsoft’s Windows 7 operating system will be released in late October, in time for the holiday season. A version of the new operating system will be available for the cheap mobile computers known as netbooks, representing a retreat from plans to place severe restrictions on the increasingly popular devices. The starter Windows package will include some limitations that lift if users upgrade to the full version. Microsoft is rated a Long-Term Buy.