Repurchase Cutbacks Spotlight Who's Healthy and Who's Not

Standard & Poor’s just reported that third-quarter stock buybacks declined by almost 48% amongst S&P 500 firms. Cumulatively, that’s almost $156 billion less for the full year than 2007.

These repurchase cutbacks give us a window into who’s healthy - and who’s not. Companies that buy back shares have higher profits and generally outperform those that do not. Firms worried about income or financing are going to be the first ones to cut back or suspend share buybacks.

Surprisingly, the Information Technology sector accounts for 25% of all buybacks. While Exxon Mobil (XOM) took the top spot, energy companies only accounted for 18% of buybacks. That’s low, considering their record-breaking profits this year. Does this spell trouble for gas giants in 2009?

It was technology companies that dominated the top 10 spots. In the third quarter, they were led by: Microsoft (MSFT), International Business Machines (IBM), Intel (INC) and Hewlett Packard (HPQ).

Apparently one of the worst economic environments in almost 70 years hasn’t really hurt these tech giants. It’s nothing like the dotcom fallout. And while tech spending is expected to slow next year - a 1.6% growth rate isn’t a decline.

Comments

[prudentinve...:]

Share buybacks inflate the value of options held by insiders disproportionately to their effect on the value of the stock.

If an honest board wants to return surplus money to shareholders it should be in the form of dividends. Alternatively, the board should increase the strike price of options in the event of a share buyback to reflect the lower number of shares outstanding. This way, the value returned to all shareholders including management is the same per share, rather than favoring option holders at the expense of the other shareholders.

2008 Dec 11 08:48 PM

[SivBum:]

Unfortunately the bosses hold the purse strings and the votes. Repricing only goings on when they are underwater, never the other way around.


On Dec 11 08:48 PM Prudentinvestor wrote:

> Share buybacks inflate the value of options held by insiders disproportionately
> to their effect on the value of the stock.
>
> If an honest board wants to return surplus money to shareholders
> it should be in the form of dividends. Alternatively, the board should
> increase the strike price of options in the event of a share buyback
> to reflect the lower number of shares outstanding. This way, the
> value returned to all shareholders including management is the same
> per share, rather than favoring option holders at the expense of
> the other shareholders.
>

2008 Dec 12 11:17 AM

[Kunst:]

Isn't it interesting how many companies wanted to buy their own shares at record high prices, and now don't want to buy them at half that level.

2008 Dec 14 12:06 AM