Buybacks Getting Bigger

4/19/2010


Share repurchases are on the rise. For at least three reasons, that is encouraging news:

Historically, buybacks have been a signal that companies are both financially strong and confident about their future.

Strong spending on stock buybacks suggests companies see their shares as attractively valued.

Buybacks tend to reduce the share count, which in turn boosts per-share growth of profits and cash flows.

S&P 500 Index components increased their spending on repurchases in the last two quarters after declines in six of the previous seven quarters. December-quarter buybacks of $47.8 billion were up 37% from the September quarter and 98% from the June quarter. However, repurchases still pale relative to the $141.7 billion spent in the December quarter of 2007.

At the end of 2009, nonfinancial companies in the S&P 500 held a record $831 billion in cash. They have become more conservative since the financial crisis but certainly have the means to buy back shares aggressively.

In 2007 and 2008, index components’ spending on repurchases topped 75% of operating earnings. In 2009, buybacks accounted for just 28% of earnings. If the economy continues to improve and corporate executives become less nervous about the future, buybacks should increase substantially in coming quarters.


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