On the Timing / Importance of Stock Buybacks

Posted on Monday, December 14, 2009

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WSJ reports:

During the third-quarter, stock buybacks moved off the record low levels seen during the March-through-June period. But the total level companies spent buying back their own shares remained at depressed levels, S&P analysts reported.

Preliminary results showed that S&P 500 companies spent $34.8 billion on stock buybacks during the third quarter of 2009. That represents a 61.2% decline from the $89.7 billion spent during the third quarter of 2008, and a 79.7% decline from the record $172.0 billion spent on stock buybacks during the third quarter of 2007.

Still, stock buybacks for the third quarter of 2009 bounced back 44% to $34.8 billion from the $24.2 billion spent during the second quarter of 2009, when the expenditures hit their lowest level since the first quarter of 1998. (That's when S&P first started collecting data on buybacks.)

While buy-backs might be showing signs of recovery, ongoing corporate timidity reflects, in part, on the shut down of the borrowing markets last year during the financial crisis. Companies — those that survived — remember those days with trepidation and don't want to get caught short if a similar credit freeze strikes again.

While I understand there are multiple considerations for stock buybacks (i.e. a way to lever the business / earnings, prevent takeovers, etc...) corporations have not exactly been the best market timers. This can be seen in the chart below which compares the market cap of the S&P 500 against the level of stock buybacks. Just as important, the chart shows the size of the stock buybacks relative to the market cap of the S&P 500 (i.e. they were LARGE).

How large? Buybacks accounted for 4.6% of the 6.5% total yield of the S&P 500 (as measured by dividends AND buybacks as a percent of the year end market cap) in 2007.

And now? Just 1.2% of the 3.2% total yield off of an S&P 500 market cap that is 24% below year end 2007 levels as of yesterday's close.

The key question for equity investors... will buybacks bounce back or were those levels of purchases made from 2005-2008 outliers?

Source: S&P / Index Arb

Jake 15 Dec, 2009

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Source: http://econompicdata.blogspot.com/2009/12/on-timing-importance-of-stock-buybacks.html
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