Cash Management

Do Buybacks Boost Share Price?

Companies continue to repurchase stock at a record pace. But the buyback programs don't always boost corporate share prices, says S&P.
Stephen TaubDecember 17, 2007

Buyback mania continued in the third quarter. Share repurchases among companies that comprise the S&P 500 reached a record $172 billion in the September period, according to a new report from rating agency Standard & Poor’s.

The third quarter stock buyback volume easily surpasses the previous record of $158 billion set during the second quarter. It also was 56.6 percent higher than the year ago total.

Howard Silverblatt, senior index analyst at Standard & Poor’s and author of the report, said buybacks are expected to continue at a strong pace into the fourth quarter and throughout 2008. He cites several reasons for the current voracious appetite for buybacks, including the immediate gratification witnessed through earnings reporting, requirements for current option exercising, and resources of non-financial companies.

In general, companies repurchase their stock to prop up the price of the shares. However, companies frequently fall short of that goal, according to a separate report published by S&P last month. The earlier study found that over the last 18 months, only one of every four S&P 500 companies (103 companies) that repurchased shares outperformed the index.

The remainder would have been better off putting their excess cash into an S&P 500 index exchange-traded fund, noted the report. “The tendency is to assume that corporate share repurchases lead to a sustained uptick in stock performance, and the more activity the better,” noted the study’s authors, Stewart Glickman and Todd Rosenbluth, directors at Standard & Poor’s equity research group.

“While these initiatives may create a positive aura around a company’s shares, our study showed an inverse link between repurchase activity and the returns achieved — the companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period. Based on these findings, we recommend shareholders take a close look at a company’s buyback history and their results before bidding up share prices.”

Nevertheless, share repurchase programs have heated up over the past three year. During that period, the total amount of stock buybacks by S&P 500 companies amounted to more than $1.32 trillion, slightly eclipsing total capital expenditures of $1.28 trillion, the newer report.

In all, 279 issuers spent more on buybacks than on capital expenditures. The three-year buyback total also was more than triple that of corporate research and development spending ($376 billion), and more than double that of common stock dividend payouts ($605 billion).

Total shares repurchased during the three-year period amounted to 38 billion shares, which equates to 12.5 percent of the current outstanding shares. On a sector basis, information technology companies accounted for the most buyback activity since 2004, representing 21.65 percent of the total buying, and reducing its share count by 3.95 percent.

In the past three years, the biggest buyers of their own stock as measured by total dollars spent were Exxon Mobil, Microsoft, IBM, Procter & Gamble, Cisco Systems, Bank of America, General Electric, Hewlett-Packard, Goldman Sachs Group, and Time Warner.