Strategy

Wall Street Mixed on Buyback Mania

In the first half of the year, U.S. companies announced plans to repurchase $126 billion of their own shares. A new survey suggests that reinvestme...
Stephen TaubAugust 17, 2005

In the second quarter of this year, 54 percent of the companies in the S&P 500 index reduced their total number of shares outstanding by buying back company stock. That’s half again as many companies as the 36 percent for the first quarter, according to The Los Angeles Times, citing Standard & Poor’s market analyst Howard Silverblatt.

And in the first half of the year, U.S. companies announced plans to repurchase $126 billion of their own shares — 76 percent more than they committed to buy back during the same period in 2004, according to Times, which cited data from Thomson Financial.

Companies generally buy back their shares for two reasons. Some want to shrink their overall share base and prop up the share price. Others simply want to maintain a certain level of shares outstanding, so they repurchase stock as employees and executives exercise options.

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Earlier this week, the Times pointed out, Wachovia Corp. announced that it had authorized the repurchase of 100 million shares. Combined with a prior buyback authorization, the banking giant plans to shrink its number of shares outstanding by 9 percent.

This week also saw the release of a survey by Merrill Lynch, which found that a growing number of major investors prefer companies to reinvest extra cash in the company rather than use it to buy back shares.

Exactly half of the 288 fund managers who participated in Merrill’s survey said that companies are underinvesting in their businesses.

When were asked what they would most like companies to do with their cash flow, 42 percent of respondents said “return cash to shareholders”; that figure is down from 49 percent in May. On the other hand, 38 percent said that companies should “increase capex,” up from 30 percent.

“If higher investment spending gains the upper hand, this could lay the foundation for a more enduring economic recovery,” suggested David Bowers, chief global investment strategist at Merrill Lynch, in a statement.

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