Capital Markets

S&P 500 Buybacks Up 91 Percent

Standard & Poor's attributed the record level of buybacks to an increase in employee stock options exercised, combined with the desire by many comp...
Stephen TaubJune 7, 2005

Share buybacks by companies in the Standard & Poor’s 500 jumped 91 percent during the first quarter compared with a year earlier, according to a new report by the credit ratings and research firm.

Standard & Poor’s attributed the record level of buybacks to an increase in employee stock options exercised, combined with the desire by many companies to hold down total shares outstanding so the holdings of existing investors are not heavily diluted. Indeed, investors especially love buybacks, which increase earnings per share outstanding and frequently pump up the share price as the market attempts to maintain the price-to-earnings ratio.

During the first three months of 2005, stock buybacks by S&P 500 companies increased to a total of $82 billion, up from $66 billion in the fourth quarter of 2004 and $43 billion in the first quarter of 2004.

“Companies are now utilizing their enormous cash reserves to return value to shareholders,” explained S&P equity market analyst Howard Silverblatt, in a statement. “They are doing this directly through both dividend increases and initiations, and indirectly through actual share reductions.”

Standard & Poor’s expects buyback activity to continue. “Given the number of options already outstanding that must be satisfied, the desire to assist earnings per share via share reduction, the enormous cash reserves, and the growing attention by investors to value returned, 2005 buybacks are expected to significantly outpace 2004 and easily outpace actual 2005 dividend payments,” added Silverblatt.

In the past week, Universal Health Services Inc. — a $3.6 billion market-cap provider of health services — announced that it increased its stock buyback plan by 3.5 million shares, in addition to the remaining 84,000 shares previously authorized. And Sysco Corp. announced that it will purchase up to 10 million shares of its common stock.

A number of small companies are also buying back their stock, including engineering and construction consulting firm Michael Baker Corp. and staffing company MPS Group Inc.

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