Largecap Share Buybacks Continue To Boom

Includes: IVV, SPY
by: IndexUniverse

The companies of the S&P 500 index engaged in a record level of stock repurchases in the first quarter of 2007, Standard & Poor’s said in a press release Friday. In all, $117.7 billion in stock was repurchased, a 17.5% increase from the first quarter of 2006 and a more than 275% increase from the first quarter of 2001. Largely as a result of the buyback activity, the 12-month buyback and dividend yield of the index has more than doubled from first quarter 2001 to 5.34%.

The pace of buybacks picked up in the last quarter of 2004, after the market seemed to have recovered and stabilized following the slump that started in 2001. They jumped by more than $20 billion from the preceding quarter to $66 billion. In the past 10 quarters, S&P 500 companies have spent nearly $1 trillion ($965 billion) on share buybacks, and nearly 60% of the companies have seen share reductions during that time period.

A company can decide to buy back its stock for any number of reasons, but in this case the trend seems to be spurred by an excess of cash as the stock market continues to climb. Rather than issuing larger dividends, which are up just 9.52% from first quarter 2006 and 72.39% from first quarter 2001, management teams can take the opportunity to express confidence in the prospects of their respective companies while boosting EPS and still benefiting shareholders. And of course, buyback authorizations need to be fulfilled.

However, S&P senior index analyst Howard Silverblatt pointed out that with the current high stock prices, repurchasing dollars don’t go as far toward reducing share counts as they do in weaker markets. “If companies wish to get the same level of impact on EPS as they did in prior years, they will have to invest more,” he says.

The information technology sector, S&P said, made the most repurchases, accounting for 22.8% of total buybacks in first quarter 2007 but only 15.1% of the index. Not surprisingly, Microsoft was also one of the most aggressive repurchasers, buying back $24.3 billion in the preceding year.

The top 10 repurchasers accounted for 31% of stock buybacks among S&P 500 components for the year ended March 2007. At the same time, the index registered returns of 11.83%. Exxon Mobil (NYSE:XOM), the largest stock in the index with a 3.38% weighting, led the pack with $31.6 billion in buybacks for the 12-month period—that’s roughly 7% of the total $450 billion in repurchases made by S&P components during that time. Exxon’s repurchases aren’t too surprising considering the state of the oil market, of course. Other companies registering significant buybacks were Procter & Gamble with $10.3 billion and Time Warner with $11.8 billion.

Silverblatt says that positive investor reaction, extra cash and the desire to support EPS and stock prices indicate companies will continue to buy back shares just as voraciously for the time being, but he adds a caveat: “If buybacks decline, the question as to where will the EPS growth come from and what will the companies do with the shares will have to be answered.”