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