US Cos On Buyback Spree ...what does it says.....

CORPORATIONS are, once again, devoting billions of dollars to stock buybacks, using a record amount of cash on their books to provide a quick reward for shareholders. US public companies have announced plans to buy back $106.1 billion in stock since the start of ‘10, according to TrimTabs Investment Research. By contrast, companies announced plans for $132.5 billion in buybacks in all of ‘09.


In theory, equity buybacks add upward pressure on a stock price while also boosting earnings per share by reducing the number of shares outstanding. They also can betray a lack of more productive uses of cash. “Stock buyback programmes represent a failure of management to find attractive internal investments,” says John Brady, senior vice-president at MF Global (MF).


Companies aren’t just promising to buy back their own shares. In the fourth quarter of ‘09, companies in the S&P 500 index actually did purchase $47.8 billion of their own shares, up 37.2% from the previous quarter, according to Standard & Poor’s (MHP) data. Both plan announcements and actual repurchases are well below the rapid pace of buybacks in ‘07. Last quarter’s share purchases were 72% below the $172 billion in buybacks in Q3 of ‘07, a record amount for one quarter. In all of ‘07, firms announced $809.5 billion in buybacks, while actually purchasing $589.1 billion in shares. If recent news and data suggest companies are returning to buybacks, one explanation is record amounts of cash on corporate balance sheets, market experts say. “Corporate profits are rebounding tremendously, and they have this money to put to work,” says Mike O’Rourke, chief market strategist at New York brokerage BTIG. In Q4 of ‘09, average earnings for the S&P 500 rose 97.9% from the previous year, according to Bloomberg. S&P’s estimates that S&P 500 firms had $831 billion available at the end of ‘09, according to a measure that excludes utilities, financial, and transportation companies, all of which typically hold a lot of cash for operations. Despite a brutal recession, cash balances are 27% higher than those at the end of ‘08. All that cash comes from a variety of sources: Companies have cut costs, cancelled capital spending, issued new shares, and taken advantage of low interest rates to borrow money. Companies aren’t “confident enough in the recovery” to start spending on irreversible bets such as acquisitions or big capital spending projects, says Vincent Deluard, TrimTabs’ global equity strategist. Quarterly dividends, another method of rewarding shareholders, have a downside for companies: Once increased, dividends are expected to be paid out regularly each quarter; otherwise, the market could penalise the companies’ shares harshly. Buyback plans-spread over a year or more, often without a purchase schedule-give companies much more flexibility. Moreover, companies are not required to buy all the shares they say they will, giving management flexibility with cash.


“Buybacks are the easiest way to return cash to shareholders without committing to anything,” Deluard says. Given worries about the economy, companies remain cautious about using their cash, including for buybacks. Even with the rebound in buybacks last quarter, the S&P 500 share count actually increased, notes Howard Silverblatt, S&P senior index analyst. “Companies are going to need a couple of quarters to see everything is kosher,” he says. Assuming the economy continues to recover, he expects companies to wait until the second half of ‘10 before making firm commitments to share purchases, capital spending, or dividends.