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U.S. firms have repurchased more than one-third the dollar amount of shares that their buyback programs allow.
Vincent Ryan, CFO Magazine
June 15, 2012
Many U.S. companies currently have active share-repurchase programs, which will enable them to bump up their stock price or earnings per share in coming months. But will they use those programs?
In the past 12 months, 565 U.S.-based firms have announced share-repurchase programs, worth $185.9 billion. But their actual purchase activity has been somewhat subdued. Data provided to CFO by S&P Capital IQ shows that U.S. firms have collectively repurchased a little more than one-third of the dollar amount of shares — $68.8 billion — that their buyback programs allow. (The data is for programs that are still active, and the transactions include both tender offers and open-market deals.)
The pace of repurchases is not unusually slow: buyback programs can run three years or more. And by some accounts, only about a third of buybacks are ever fully executed.
Indeed, when CFO last examined the pace of buybacks, in July 2010, nearly half the companies with share-repurchase authorizations hadn't bought back any shares. Today, by contrast, all 565 companies have bought at least some shares, and 67 companies have repurchased 100% of the shares they said they would buy.
But among firms that have buyback plans of $200 million or more and announced their plans prior to March, 20 have bought back 8% or less of their allotment as of the first quarter, according to S&P Capital IQ (see chart). The slowest repurchaser, Lam Research, bought back only $12.5 million worth of common stock out of a $1.6 billion total authorization. (On May 15, Lam announced an accelerated stock repurchase agreement, under which a company buys back shares immediately from an investment bank, which borrows the shares it sells to the company.)
With equity markets slumping, it could be a good time for companies to be in the market for their shares, says Michael Gumport, founding partner of MG Holdings/SIP, a corporate finance advisory firm. "With short-term, small corrections — 10% to 15% over a month, for example — buybacks tend to pick up," he says.
But when the market falls for an extended period, buybacks "dry up," says Gumport. Instead of buying their stock when prices are low, companies "get scared like everybody else when they don't know what the future holds, and they move into a conserve-cash mode," he says.
That habit causes the majority of share-buyback plans to be unprofitable. Over the last 10 years, "the average company has made zero on stock buybacks, and a long list of companies have lost money," says Gumport. "They'd have done better just putting their money in the bank."