Wednesday, September 16, 2009

Stock Buybacks Down 72% Year over Year; and at Lowest Level Since at Least 1998

Some interesting data on stock buybacks; I was following this closely in 2007 but there were obviously more important matters to look at in 2008. [Sept 30, 2007: Buybacks are all the Rage]

let's look at the supply of US stock. Do you realize the level of buybacks that have been going on? Not announced buybacks but tried and true "after the fact" reporting of buybacks is >$100 BILLION for 8 quarters in a row. It has accelerated lately... $118 Billion in Q1 2007, and $158 BILLION in Q2 2008.

Even if we drop back to low $100s for Q3 and Q4 2007 that is an
annual buyback bing of just under $500 Billion. On top of that is 6 previous quarters (back half of 2005 and 2006) of another $600 Billion+. So this is $1.1 Trillion of stock value that will be taken out of circulation by year end 2007.

So if we retired on average say $110 Billion a quarter, that is essentially saying we are eliminating 10 huge companies the size of 200th largest stock in the US (market cap $11.8 Billion) ... or 40 a year. Or if we move down the scale a bit to the 500th largest company size, which is $5.75 Billion, we are eliminating 20 of those companies a quarter; or 100 a year. These are not tiny fish, these are companies at the bottom end of the SP500...

$1.1 Trillion in 6 quarters is amazing when you consider the entire market capitalization of the S&P 500 was just $14 trillion at the time. (and lower now)


Since growth has been relatively stagnant at many US companies, pumping up earnings PER share via buybacks has been a corporate strategy. Even if your actual net income is flat or shrinking (i.e. you are doing nothing as a CEO other than babysitting a stagnant company), if you reduce share count you are "creating value". This is part of the discussion of why we are not seeing as much innovation as in the past in our major corporate public troughs [Sep 8: Some Interesting Reads] - pumping up near term profits via accounting maneuvers is more important than Research & Development to some CEOs whose only focus is on their short(er) term tenure rather than the long term health of a company. Or as Buffet and Boggle call it, the "short term-ism" of the economy and markets we now have. [Sep 9: WSJ - Vanguard's John Bogle, Warren Buffet Speak Out Against Short Term Nature of Markets] It really continues to come back in so many parts of the system, to the same compensation schemes that are so dominated by short term gains, rather than long term results. It keeps working until the host body the leech feeds on is shriveled. And why should CEOs act irrationally and worry about the company long term? They shouldn't - this is the system we've built and encourage.... in fact, celebrate.

Stock buybacks are also another convenient way to hide the massive option granting at the public trough of corporations. Issue $X millions of options (mostly to the top handful) then use the company coffers (or add debt) to offset those options as they become exercised so that the share count doesn't explode. It's all part of the fun and games of running corporations for the benefit of a few at the top. (these next 2 quotes were not by me, but a Seeking Alpha article from 2007 I quoted)

For one, buybacks are used to cover up costly options schemes that would otherwise dilute the company’s stock. It’s a neat trick to report profits and then use those profits to cover the real expense of an options program.

And yet another reason management prefers buybacks

....buybacks favor management over current shareholders. Corporations have two choices on how to return money to shareholders. They can pay it out as dividends to current shareholders, or they can buy back stock. The problem with buybacks is that they raise the value of both existing shares and shares that have yet to be issued, aka options. Buying back stock today increases the value of the options that executives will cash in tomorrow. And faced with the option of choosing buybacks vs. dividends, not surprisingly, most corporate officers are choosing buybacks.

Just remember these points when the popular dogma of "share buybacks are great!" is thrown around - it is not quite so simple as that.

However with cash at a premium the last year, and debt (at least in the short term) eschewed; the stock buyback game, which was roaring in 2006 and most of 2007, is not so easy to execute of late. We've only wasted $24B last quarter in retiring shares (again much of which are going right back out the door in new option grants to the top honchos), and of that 23% was at 1 company (Exxon) and 7.8% at another company (Walmart). Granted these are 2 mega cap companies so they would tend to dominate the aggregate figures.

Now the good news - is lending rates (thanks Ben!) are ultra low (free money!) so a new era of buybacks should soon be around the corner since its no skin off executives nose to lard their company up with debt to buy back shares (haha, it sounds incredulous I know - but that was a corporate strategy for many years, remember these guys are paid big bucks for this "innovation" - and if you doubt them, they'll move away to another country!).

  • Standard & Poor's said Tuesday that stock buybacks among members of its benchmark stock index are at their lowest levels since at least 1998 and are seen remaining weak "for the foreseeable future."
  • The 72% plunge from a year earlier in the second quarter to $24.2 billion is the lowest since S&P began tracking such data on S&P 500 companies. It comes as corporations have been hoarding cash to ride out the recession and as stock markets rebounded sharply during the quarter.
  • S&P also determined that only 169 companies repurchased stock during the quarter, compared to 288 a year earlier.
  • Buybacks have tumbled following a bonanza earlier this decade that topped out in the third quarter of 2007 at $172 billion for S&P 500 companies. The stock market was reaching its recent top at that time.
Kind of ironic no? Corporate officers buying at the highest levels of the market... but as shown above, there is a reason for them to buy regardless of price. Personal profit motive.

Unlike other nations without such "extravagant" compensation packages - our dividend ratio has dropped precipitously versus "the old days" when executive pay was more in line with the rest of the world. It is not random chance that dividend yields of markets in other countries are (mostly) materially higher than what is now the case in the U.S. And for those who don't think there is a connection between dividend vs buyback payouts based on current "head honcho" compensation package design... I have a AAA rated MBS full of CA subprime mortgages to sell you.
  • At such levels, index members were spending nearly double the amount on buybacks than they were on dividends, said S&P analyst Howard Silverblatt.

[Oct 13, 2007: Buybacks Continue at Record Pace]

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