Buybacks Are Back In Style, But Actions Speak Louder Than Words
It’s difficult not to have noticed, buybacks are back in style. Companies are rushing to show how solvent they are, and prove
to the world that they have weathered the recession storm, by no better a way than buying back their shares – which at the
current level, the logic would follow to say, is at a bargain, otherwise why would companies buy them. But before investors
jump on the band wagon they need to look a lot closer at the announcements – most of which are a reauthorization from the
Board of Directors to senior management that they can now again go back into the open market and do buybacks, depending
on market conditions. That willingness to reauthorize is a positive sign, but the actual trades have yet to appear. While Q4
saw a 37.2% increase in buybacks from the depressed Q3 level, the full year 2009 posted a 59.5% decline from 2008 and a
76.6% decline from 2007. What we have seen to date is that companies are matching their buybacks with their employee
option exercising, therefore preventing earnings dilution, which is a relevant item. This has typically been the use for buybacks,
followed by M&A and then SCR (Share Count Reduction). I found 50 issues within the S&P 500 that had SCR in Q4 (notable
in the Consumer Discretionary sector), but otherwise the actual share count has gone up, even if you remove the Financial
sector (which increased 20%). Overall, investors first have to decide if the buybacks are actually happening, then if they are,
what their use is for – prevention of earnings dilutions or SCR.
Then of course, there is the continuing debate of buybacks, which on the short run increases buying pressure (and price
hopefully), helps EPS, but keeps the shares in the company hands, verses dividends, which puts the money in the hands of
investors, who if they like the company can use the DRP (Dividend Reinvestment Program) to buy more shares, verses, of
course, the pure plowback theory that the company can best decide how to use the money.
A link to the full Q4 2009 S&P buyback report, including related notes on dividends, cash, CapX and the recent Health Care tax
reversal charge is below
BUYBACKS ARE BACK IN STLYE, BUT ACTIONS SPEAK LOUDER THAN WORDS
By Howard Silverblatt, Senior Index Analyst, S&P Indices
S&P 500 buybacks rebounded 37.2% ($47.8B) from the third quarter ($34.8B), and 97.6% from their record Q2 low ($24.20B;
data series starts in Q1,’98)
But they remain off their 72.2% off their Q3,’07 high (172B)
For 2009, buybacks declined 59.5% to $137.6B from $339.7B in 2008 and 76.6% off the record 2007 $589.1B
214 issues did buybacks, up from 195 in Q3, and 169 in Q2,’09
Information Technology continues to dominant, increasing expenditures 44.8% ($15.25B, vs. $10.54B for Q3), and accounts for
31.9% of all buybacks
Telecommunications and Energy were the only sectors to decrease their buybacks, with Exxon reducing their buybacks by
44% to its lowest level since Q2 2004, but still posting its 38th consecutive quarter of share count reduction
For the third quarter in a row, none of the issues made the top 20 historical list for largest stock buybacks
Most companies still appear to be matching their buybacks with their option expiration in order to limit EPS dilution
We did find 50 instances of share count reduction in the index, most notably in consumer Discretionary
Diluted shares used for EPS calculations in the Financial sector increased 20.0%% for Q4,’09, causing the index to
increase +4.47%, but ex-Financial the index was +0.62%
For the year diluted share count has gone up 68.4% for Financials, 18.3% for the index, and 4.1% ex-Financials
Capital Expenditures were up for the Q4 over Q3 period (preliminary +18%), but down 25.6% for 2009
Cash for the S&P Industrials (Old) set a new record, up 1.3% for the quarter (even with major M&A cash deals), and up 27.0%
from Q4,’08. Information Technology has 14.9% of its market value in cash and represents 38.2% of all cash holdings, and
Health Care has 14.3% representing 22.4%
This quarter has seen eight issues start a dividend (BRCM, CCL, HST, MAR, PDCO, SBUX, TLAB, TWC), with a net change
in the indicated dividend rate of +$5.1B, compared to last years Q1,’09, the worst quarter is dividend history, which had a
$38.7B reduction
Expect buyback base (covering employee options) to be tied to market, with 2010 buybacks topping cash dividends
Share count reduction is bold, either issues will need to be true believers (with excess cash over M&A needs), in a ‘situation’ in
which they wish to support their stock, or be doing a clean-up of odd-lots (popular a few decades ago and post T breakup,
actually heard some rumors on this, but I’ve found no evidence)
Cash should start to decline due to M&A, CapX, and catch-up structural spending, but I expected a flat or slight decrease in
Q4,’09 (HC M&A $35B in cash), and the value increased
Expect CapX to increase, but without an accelerated depreciation schedule containing much higher limits, to be short of 2008
levels
Expect dividends to remain positive, but at a lower rate; issues need more proof before they will commit, if economy and
market continues late Q3 is a logical time – know Q1 & Q2, and most of Q3, and boards can declare increases for either Q4 or
Q1,’11
FYI – The Q1 tax accounting charge reversal under the Health Care bill for T, DE, CAT,…appears to me to be fair -> prior
treatment was double-dipping (max $4,750 @ 28% = $1,330 tax free subsidy, but full $4,750 deductable; $1330 remains tax
free). If the government (companies, labor -> OPEB is not as popular outside of represented workers; will release a full OPEB
report in Q2) wants to give higher subsides then they could change the limits. Note the charge is to the carrying value of future
benefits (non-cash), which reverses the prior impact of incorporating the benefit
Over the past 21 quarters, since the buyback boom began in Q4 2004 (through Q4 2009):
Operating earnings:
$3.31 Trillion
As Reported earnings:
$2.67 Trillion
Capital Expenditures:
$2.35 Trillion
Buybacks:
$1.91 Trillion
Dividends:
$1.17 Trillion
This quarter has seen eight issues start a dividend (BRCM, CCL, HST, MAR, PDCO, SBUX, TLAB, TWC), with a new change in the
indicated rate of +5.1B, compared to last years Q1,’09, the worst quarter is dividend history, which had a $38.7B reduction.
Howard Silverblatt
Senior Index Analyst
S&P Indices
55 Water Street
New York, New York 10041
212-438-3916 (phone)
212-438-3909 (fax)
www.standardandpoors.com
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