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From my academic training, Mathematics, I intend to focus on the quantitative study, basing my analysis on historical data, bearing in mind my position of "Outsider". May the best investment opportunities be accessible to the vulgar human? We shall see ...
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  • Which Companies Are Spending More Money On Buybacks?

    Even as the U.S. economy struggles to completely recover from the global financial crisis of 2008-09, corporate profits are soaring. However, these profits have not been reflected in much higher dividends as many companies are preferring to perform share buybacks. Boosted by the Federal Reserve's near zero interest-rate policy, last year S&P 500 (SPY) companies bought back around $450 billion worth of stock. During the past few months, many more companies launched significant repurchase programs but are increasingly being funded by debt which raises some questions about its merits.

    With the earnings season finished recently, it is now possible to check how share buybacks have evolved. According to Facset data, aggregate share buybacks in the S&P 500 grew by 12.3% to $122.8 billion during the second quarter of 2013. This is the highest quarterly amount since the third quarter of 2011, and given the poor track record companies usually have to time the stock market it may be a signal we are at or near the top.

    Apple (OTC:APPL) has been one major contributor for the overall share repurchase amount. The company repurchased $16 billion worth of shares, being the largest quarterly share repurchase activity since 2000. Without Apple, the overall growth on share buybacks during the quarter would have been negligible. Despite this huge amount spent on share repurchases Apple has underperformed the S&P 500 during the second quarter, which naturally raises some question about the company's share buyback program usefulness. Apple currently has a dividend yield of 2.49%, which could be significantly raised if the company decides to distribute more cash to shareholders instead of buying back its own shares. During the last quarter, Apple's dividend outflows were just $2.8 billion which is ridiculously low compared to the money spent on share buybacks.

    Other companies that have spent a considerable amount of money on share buybacks are Merck (MRK), General Electric (GE), and Exxon Mobil (XOM) which have spent more than $4 billion during the second quarter buying back its own shares. However, only Merck has outperformed the S&P 500 during this period, adding further proof that share buybacks don't add much value especially in the short-term.

    General Electric has indicated intent to maintain aggressive share buyback activity over the next couple of years, given that it raised its program from $25 billion to $35 billion through 2015. For 2013, the company expects to spend $10 billion, which about $6billion was performed during the first half of the year.

    Going forward, share buybacks activity should increase following Microsoft's (MSFT) announcement of a $40 billion share repurchase authorization with no expiration date. This is in-line with its previous share buybacks programs, but after its recent takeover of Nokia (NOK) it could opt to save some cash. Moreover, it also announced a 22% increase to its dividend from $0.22 per share to $0.28. This represents an annualized $1.12 dividend per share, or a forward dividend yield of 3.45%. For a technology company this dividend yield is quite attractive, and justifies the strong rise on Microsoft's stock price when the dividend raise was announced.

    Conclusion

    Usually companies treat share buybacks as a strong part of shareholder's remuneration, but for income investors it doesn't translate into more money in their accounts. Moreover, considering the four companies that spent more money repurchasing its own shares during the last quarter, only one was able to outperform the S&P 500 index. This means that this money was better allocate directly to shareholders than buying back stock. Therefore, in my opinion, income investors should buy stock from companies that put more money on their pockets, like Microsoft which recently raised its dividend instead of its share buyback program and has outperformed the S&P 500 index during the past few months showing that this strategy offers a better value proposition to shareholders than aggressively buying back its own shares.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Sep 26 7:34 AM | Link | Comment!
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