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In this article, I will look at a brief history for shares outstanding for the Dow Jones Industrial Average (DIA). The reason I am looking at share counts is that there are two parts to the EPS equation of [Net Income/Shares Outstanding], and the one that always gets the most focus is net income. When a company reduces the share count, it can still have the same amount of net income but the EPS will be higher because of the reduced share count, and with a higher EPS the company could still trade at the same multiple but the share price would be higher. With the market at all-time highs, I thought it was a good time to see what the supply of stock [shares outstanding] was.

Data

For each of the stocks in the Dow, I went to the Morningstar Key Ratios page for each stock and copy and pasted the most recent 10-year history of shares outstanding. The data for the share counts for each stock is in the table below. For simplicity, I realize that some of the stocks that are in the Dow now were not in the Dow 10 years ago, so please keep that in mind when looking at the data below. The table shows 20 out of the 30 current Dow stocks have lower share counts now than they did 10 years ago. I was surprised at some of the companies that have increased share counts, I expected big financials like Bank of America (BAC) or JP Morgan (JPM) to increase share counts because of the financial crisis, but not big pharmaceutical companies like Pfizer (PFE) and Merck (MRK), as well as telecom giants Verizon (VZ) and AT&T (T).

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Lower Shares?

AA

867

878

879

874

868

818

935

1,025

1,161

1,076

No

AXP

1,298

1,285

1,258

1,238

1,196

1,157

1,171

1,195

1,184

1,141

Yes

BA

809

813

803

788

773

729

713

744

753

762

Yes

BAC

3,030

3,824

4,068

4,596

4,480

4,612

7,729

9,790

10,255

10,841

No

CAT

703

707

706

684

660

628

626

650

666

670

Yes

CSCO

7,223

7,057

6,612

6,272

6,265

6,163

5,857

5,848

5,563

5,404

Yes

CVX

2,078

2,122

2,156

2,197

2,131

2,050

2,001

2,007

2,001

1,950

Yes

DD

1,003

1,000

987

928

925

907

909

922

941

942

Yes

XOM

6,659

6,512

6,327

5,967

5,578

5,149

4,832

4,897

4,875

4,628

Yes

GE

10,075

10,445

10,611

10,394

10,218

10,098

10,615

10,678

10,620

10,564

No

HD

2,289

2,216

2,147

2,062

1,856

1,686

1,692

1,658

1,570

1,511

Yes

HPQ

3,063

3,055

2,909

2,852

2,716

2,567

2,437

2,372

2,128

1,974

Yes

IBM

1,756

1,709

1,628

1,554

1,451

1,382

1,341

1,287

1,214

1,155

Yes

INTC

6,621

6,494

6,178

5,880

5,936

5,748

5,645

5,696

5,411

5,160

Yes

JNJ

2,999

2,996

3,009

2,963

2,913

2,836

2,789

2,789

2,775

2,813

Yes

KO

4,924

4,858

4,786

4,700

4,662

4,672

4,658

4,666

4,646

4,584

Yes

JPM

2,055

2,851

3,557

3,574

3,508

3,605

3,880

3,977

3,920

3,822

No

MCD

1,277

1,274

1,274

1,252

1,212

1,146

1,107

1,080

1,045

1,020

Yes

MMM

795

797

777

761

732

707

707

726

719

703

Yes

MRK

2,253

2,226

2,200

2,188

2,193

2,145

2,273

3,120

3,094

3,076

No

MSFT

10,882

10,894

10,906

10,531

9,886

9,470

8,996

8,927

8,593

8,506

Yes

PFE

7,286

7,614

7,411

7,274

6,939

6,750

7,045

8,074

7,870

7,508

No

PG

2,803

2,790

2,726

3,286

3,399

3,317

3,154

3,099

3,002

2,941

No

T

3,322

3,326

3,370

3,892

6,170

5,958

5,924

5,938

5,950

5,821

No

TRV

243

628

713

717

672

607

569

483

421

390

No

UNH

1,234

1,312

1,330

1,402

1,361

1,241

1,179

1,131

1,087

1,046

Yes

UTX

1,006

1,006

1,014

1,006

989

956

929

923

907

907

Yes

VZ

2,789

2,831

2,817

2,938

2,902

2,850

2,841

2,833

2,839

2,862

No

WMT

4,373

4,266

4,188

4,168

4,072

3,951

3,877

3,670

3,474

3,389

Yes

DIS

2,043

2,106

2,089

2,076

2,092

1,948

1,875

1,948

1,909

1,818

Yes

[Numbers in Millions]

Chart

When looking at the table above I noticed a massive increase in shares outstanding for BAC in 2009 because of the financial crisis, so I decided to compare the total share count for the Dow, and the Dow excluding its financial components BAC, JPM, American Express (AXP), and Travelers (TRV). The chart below I believe falls into the category "a picture is worth a thousand words" because of a few distinct differences between the two.

The blue line is the share count for the whole Dow. Starting in 2004 the share count steadily declined until 2008, then moved substantially higher with the financial crisis, peaking in 2010 and then resuming its decline. What I notice is that the share count for the Dow is still above what is was 10 years ago, and with the market at all-time highs it would make sense that share counts should be a lot lower than in 2003. In addition, looking at the blue line there is no clear trend, there are periods of rising and falling but no major trend can be derived from that data.

The green line, which is the Dow excluding financial components does show a very clear trend of a declining share count. Since 2003, the number of shares for non-financial companies in the Dow has decreased by 9.15%, which says something about the strength of companies to be able to buy back shares in the last decade with a period of growth prior to 2008, then the financial crisis and the continuing recovery.

(click to enlarge)

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dow

97,758

99,892

99,436

99,014

98,755

95,853

98,306

102,153

100,593

98,984

Dow Ex-Fin

91,132

91,304

89,840

88,889

88,899

85,872

84,957

86,708

84,813

82,790

[Numbers in Millions]

[Data for the chart above]

Closing thoughts

With the current low rate environment, record cash on corporate balance sheets, along with record earnings, I expect the trend of non-financial companies buying back large quantities of shares to continue well into the future. The real opportunity I believe could be in the financial stocks in the Dow, looking at each one, BAC is still increasing its share count and has not hit a peak, and I would stay clear until BAC shows that its share count decreased from the previous year. On the other hand, the other financial stocks in the Dow have hit a peak share count. The share count for AXP has been declining every year for the last 10 years except for a small increase in 2010. The share count for JPM peaked in 2010, and has gone down every year since then. Finally, the share count for TRV peaked in 2006, and since then has reduced its share count aggressively, now having almost 50% less shares outstanding then in 2006.

I believe if financial stocks in the Dow start buying back large amounts of shares, that coupled with the other stocks in the Dow continuing to reduce shares, this could lead to less supply of stock available, thus driving prices higher for the underlying stocks in the Dow, which in turn will drive the price of the Dow higher.

Disclaimer

Source: Share Buybacks Driving The Dow Higher