Capital Markets

Buybacks Set Record High

Companies are now spending as much on stock buybacks as they are on capital expenditures.
Stephen TaubAugust 25, 2006

Buyback mania continues.

The S&P 500 repurchased a record $116 billion of stock in the second quarter, according to a new study by Standard & Poor’s. This was up 43 percent from buybacks during the second quarter of 2005 and 175 percent from the second quarter of 2004.

The level of buybacks among S&P 500 companies in the quarter ending this June also topped the $104 billion record set in the fourth quarter of 2005. Altogether, more than 40 percent of the companies that comprise the S&P 500 reduced their share count during the second quarter, according to S&P.

“The unprecedented expenditure on buybacks and the resulting share count reduction is having a material effect on both earnings-per-share and cash flow,” said Howard Silverblatt, senior index analyst at S&P, in a press release. He added that this could eventually have an impact on the supply of open market shares, and therefore the share price itself.

The number of buybacks began to pick up during the fourth quarter of 2004 and has continued to grow in both the size of the buybacks and the number of participating companies, according to the report. During the past seven quarters, S&P 500 issuers have spent more than $630 billion on buybacks, with half of the issuers posting fewer shares now than they did seven quarters ago.

Indeed, as reported earlier this month, share-repurchase activity among S&P 500 companies in the first quarter of this year surged 22.1 percent over that of the first quarter of 2005.

S&P says companies are now spending as much on stock buybacks as they are on capital expenditures, and Silverblatt calculates that the share-count reduction boosted earnings-per-share for more than 20 percent of the issuers in the S&P 500 during the second quarter.

There are two main reasons companies repurchase their shares — to boost their sagging stock and to offset dilution from executives and employees exercising stock options.

The information technology industry, which lost 9.8 percent during the period, spent the most on stock buybacks last quarter. The sector, which represents less than 15 percent of the total market value of the S&P 500, accounted for one-quarter of the S&P 500 buybacks, according to S&P. Telecommunications issues, which lost just 1.4 percent during the second quarter, registered the least amount of buybacks, the research firm added.

Looking out to the rest of the year, S&P says it expects the strong buyback activity within the S&P 500 to continue. “The activity will be fueled in part by the positive impact it is having on earnings-per-share, and the desire of S&P 500 companies to satisfy the demands of investors to utilize built-up, record cash reserves,” adds Silverblatt.

On Friday, Home Depot announced that its board of directors authorized an additional $3.5 billion to repurchase its shares, bringing the total authorized share repurchase program to $17.5 billion. As of the end of the second quarter of fiscal 2006, the company had repurchased $12.5 billion under this authorization.