Record Amount of Share Buybacks
Big companies bought back a record $116 billion of shares in the second quarter, up 43% from a year earlier, according to a Standard & Poor’s report released Thursday.
The ratings and financial research firm said more than 40% of companies in the S&P; 500 reduced their shares outstanding with buybacks in the quarter. The previous buyback record was $104 billion, set in the fourth quarter of 2005.
“It’s unprecedented,” said Howard Silverblatt, S&P;’s senior index analyst. “We’ve never had this magnitude of buybacks.”
Last week, Microsoft Corp. announced that it was nearly doubling its share buyback plan to $36.2 billion through June 30, 2011, after getting disappointing results from a Dutch auction of the stock. A Dutch auction uses a bidding process to find the lowest price at which a company can sell its available shares.
Silverblatt said buybacks had given a “significant boost” to earnings per share for more than 20% of companies in the S&P; 500 in the second quarter. For example, a company that posts a 10% increase in net income but reduces shares by 4% would show per-share earnings growth of 14.6%, he said.
In the last seven quarters, S&P; 500 companies have spent $630 billion on buybacks. Since then, about half the companies included in the survey have shrunk their share count.
Technology companies were the most active buyers in the second quarter, accounting for 25% of repurchases. The sector represents less than 15% of the S&P; 500’s total market value.
Silverblatt said companies bought back more shares than they needed for stock options and mergers and acquisitions. In the first quarter, more than 20% of S&P; 500 companies shrank shares by at least 4% compared with year-ago levels.
Moreover, big companies are spending as much on buybacks as they are on capital expenditures. Companies also are paying more in cash dividends, but as a percentage of earnings, payouts have fallen, Silverblatt said. Companies are flush with cash after posting 17 quarters of double-digit operating earnings growth, he said.
Richard Peterson, a senior researcher at Thomson Financial who follows buybacks, said that although technology companies dominate the buyback activity, more non-tech industries are participating now.
The record level of buybacks shows that companies are confident about their prospects, said Charles Biderman, chief executive of TrimTabs Investment Research. “Companies are very bullish,” he said.
