Capital Markets

Stock Buybacks at ‘Unprecedented Level’

S&P reports that stock buyback expenditures are on track to match capital expenditures. Meanwhile Applied Materials and Cigna announce big repurcha...
Stephen TaubSeptember 18, 2006

Applied Materials said it shelled out about $2.5 billion to repurchase 145 million shares of its stock under an accelerated stock buyback program. The buyback, combined with the repurchases of nearly 9 million shares previously made during the current fiscal quarter, shrunk its total outstanding shares by 10 percent at the end of its third fiscal quarter.

In addition, the chip-equipment maker said its board approved a new stock repurchase program authorizing up to $5 billion in ongoing repurchases of stock over the next three years. Altogether, Applied Materials has repurchased over $5.8 billion of its common stock during its 2005 and 2006 fiscal years, or nearly 20 percent of its common stock outstanding at the beginning of fiscal 2005.

Meanwhile, Cigna announced on Monday that its board increased the company’s stock repurchase authority by $500 million. As a result, the insurer has roughly $722 million of repurchase authority remaining.

The announcements by Applied Materials and Cigna came the same day that Standard & Poor’s reported that the record level of stock buybacks by S&P 500 companies has resulted in a reduced share count for eight of the 10 S&P 500 sectors, as well as a reallocation of over $60 billion in sector representation. The credit rating agency made the announcement on the first trading day of the quarterly rebalancing for its U.S. indices. S&P earlier reported a record $116 billion in S&P 500 buybacks during the second quarter.

“We expect the strong buyback activity to continue as companies reap the duel benefits of improved reported earnings per share, as well as short-term price support from the buybacks,” says Howard Silverblatt, senior index analyst at Standard & Poor’s, in a press release.

The healthcare industry was by far the most active buyers of its own stock. The two industries that increased their share count were financial services and utilities. Over the last seven quarters, S&P 500 issuers have spent over $630 billion on stock buybacks, and buyback expenditures are now on track to match capital expenditures, according to Standard & Poor’s.

It added that the strong buyback programs within the S&P 500 began during the fourth quarter of 2004, and has reached “an unprecedented level” in both the number of issues and the aggregate dollar value. “Over 20 percent of the issues within the S&P 500 have reduced their year-over-year share count by at least 4 percent last quarter, adding a similar increase to their reported earnings per share,” noted Silverblatt.

Companies repurchase shares for a number of reasons—to reduce their overall share count with the goal of boosting their stock price, to reissue shares for mergers and acquisitions, and to satisfy employees looking to exercise their stock options. Interestingly, S&P points out that traditionally, companies re-issued shares as a way to cover existing employee stock options. However, the ratings agency contends that there is an increasing tendency among companies to reduce their share count through buybacks as a way to improve earnings per share.

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