Risk & Compliance

Wave Bye-bye to Buybacks

Firms sharply scaled down share repurchases in the latest quarter, a trend likely to continue, says S&P.
Stephen TaubMarch 26, 2009

Companies continued to scale down repurchases of their own shares – with the fourth-quarter drop-off in buybacks occurring at a particularly rapid rate.

S&P 500 companies shelled out $48.1 billion to repurchase stock during the latest quarter, down 66 percent from $141.7 billion during in the year-earlier quarter, according to Standard & Poor’s. For the full year, S&P-500 buybacks amounted to $339.6 billion, down 42.3 percent from a record $589.1 billion during 2007.

“This was the fourth and most significant quarter of reductions in stock buybacks,” says Howard Silverblatt, senior index analyst at Standard & Poor’s, who notes that for the first time since the 2004 second quarter S&P 500 companies have spent more on dividend payments than stock buybacks.

“The need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks a high risk component for corporate planners,” he adds. “Due to the current market environment, we expect buybacks to remain weak with the potential for companies to use existing treasury shares to satisfy options, as well as smaller M&A.”

In fact, Silverblatt asserts that cash levels set a new all-time high in the latest period, as companies continue to pull back on such expenditures as dividends, employment, capital expenditures, and buybacks. This is hardly a positive indicator. And he concedes that as cash flow decreases, cash levels could also start to decline as actual payments for previously announced layoffs, severances, plant closings and pensions are made.

On a sector basis, Standard & Poor’s says that all sectors significantly scaled back their buyback activity in 2008, led by an 88.9 percent reduction posted in Consumer Discretionary. Energy, which accounts for 13.6 percent of the market value, accounted for 24.5 percent of the buybacks, with Information Technology — the historical leader — following at 22.8 percent.

By far the largest corporate repurchaser has been Exxon Mobil Corp, which bought back more than $8.8 billion in shares in the fourth quarter. Since the 2004 fourth quarter Exxon has repurchased more than $119 billion of stock.

Buybacks started to boom late in 2004, with companies working through buybacks over the next few years to stimulate an already-stimulated market. “Given the current economic realities, it appears that the buyback bonanza has ended, or at least gone into hibernation until the return of better times,” concludes Silverblatt.