Monday, December 14, 2009

On the Timing / Importance of Stock Buybacks

WSJ reports:

During the third-quarter, stock buybacks moved off the record low levels seen during the March-through-June period. But the total level companies spent buying back their own shares remained at depressed levels, S&P analysts reported.

Preliminary results showed that S&P 500 companies spent $34.8 billion on stock buybacks during the third quarter of 2009. That represents a 61.2% decline from the $89.7 billion spent during the third quarter of 2008, and a 79.7% decline from the record $172.0 billion spent on stock buybacks during the third quarter of 2007.

Still, stock buybacks for the third quarter of 2009 bounced back 44% to $34.8 billion from the $24.2 billion spent during the second quarter of 2009, when the expenditures hit their lowest level since the first quarter of 1998. (That’s when S&P first started collecting data on buybacks.)

While buy-backs might be showing signs of recovery, ongoing corporate timidity reflects, in part, on the shut down of the borrowing markets last year during the financial crisis. Companies — those that survived — remember those days with trepidation and don’t want to get caught short if a similar credit freeze strikes again.
So... are corporations bad market timers buying at highs and issuing more shares at lows? Sure seems that way looking at the chart below which compares the market cap of the S&P 500 against the level of stock buybacks.

Or... is this just a chicken or the egg issue in that buybacks were an important CAUSE of the equity rally? The chart below does show the size of the stock buybacks relative to the market cap of the S&P 500 (they were LARGE).

How large? Buybacks accounted for 4.6% of the 6.5% (70%) of the S&P 500's total yield (as measured by dividends AND buybacks as a percent of the year end market cap) in 2007.

And now? Just 1.2% of the 3.2% total yield off of a base (the S&P 500 market cap) that is 24% below year end 2007 levels as of yesterday's close.

The key question for equity investors... will buybacks bounce back or were those levels of purchases made from 2005-2008 an extreme outlier caused by the excess liquidity in the system?

Source: S&P / Index Arb


  1. You have to be very careful with the buyback numbers, since they are very different than the change in total shares.

    If I buyback shares, but that doesn't offset other issuance through options, etc, then the idea that the buyback is a return of capital is bogus.

    The buybacks in 2005-2007 were a vehicle for managing dilution from stock option comp. The use of options in comp was correlated with the market. That's how the logic works -- not buybacks pushing prices -- prices push options which force buybacks.

  2. Matthew- thanks for the comment.

    Would a way to think about this be the marginal affect of buybacks, all else equal? Yes, there were stock options. Thus without the buybacks there would be even more dilution (i.e. $1 million in buybacks returned $1 million to shareholders regardless of whether or not there were stock options as the stock options happened either with or without the buybacks).

  3. Jake - a very nice job indeed on a topic I've followed for a while. To Matthew's point, yes indeed. The other thing of course was executive bonus maintenance! The real problem was that in a world of no hiring and no capex what did you do with all that money? Why you spent it on buybacks, which boosted the stock, your bonus and the market. Of course it left many...many companies extremely ill-prepared for the crisis when a downturn was already visible.
    For a review of the bidding and play and an inventory of mal-performers you might want to look at:
    Business Performance, Investments and the Economy: Unprepared Into the Storm

  4. you want net payout yield...check out my posts here:

    Buybacks represent about half of all shareholder payouts, and have increased steadily since the early 1980’s. There is a structural reason for this, and is due primarily to the SEC instituting rule 10b-18 in 1982 – providing a safe harbor for firms conducting repurchases from stock manipulation charges. See Grullon and Michaely [2002] for more info on the impact of Rule 10b-18.

    The paper, by Boudoukh, Michaely, Richardson, and Roberts is titled, “On the Importance of Payout Yield“

  5. I want to quote your post in my blog. It can?
    And you et an account on Twitter?