I have just released the S&P 500 second quarter buyback numbers and, shock and dismay, fewer companies did buybacks and those that did spent a lot less. Basically, not many companies showed a willingness to give up their security blanket of cash to venture out into the storm of a recession, and the difficulties of financing. Specifically, S&P 500 companies did $24 billion in buybacks during the second quarter, the lowest reported amount since at least the first quarter of 1998 – when I began tracking the data. The $24 billion represented a 72% decline from the $88 billion spent during the second quarter of last year, and an 86% decline from the record $172 billion spent on stock buybacks during the third quarter of 2007. In general, buybacks have become few and far between, falling out of favor with most investors as corporations continue to build-up cash reserves to ride them through, and hopefully out of, the recession. One simple stat shows the dramatic change. At the height of the buybacks two years ago, companies spent 180% more on stock buybacks than they did on dividends. Now, even after dividends have decreased 22%, buyback spending is just half of dividends payments.
For the second quarter 169 of the 500 issues reported buybacks, compared to 288 during the Q2,’08 and 324 in Q2,’07. Additionally, the Q2 numbers were very top heavy, with the top 20 issues accounting for 78% of all buybacks, compared to 31% for the prior year. There are however companies that are still doing buybacks. Exxon Mobil spent the most during the quarter, with $5.2 billion in buybacks accounting for over a fifth of the index’s activity. Wal-Mart, which has increased its share repurchase program, ranked second with $1.9 billion in buybacks. Other notable’s increases, on a lower dollar scale, included Family Dollar Store, Staples and MedcoHealth Solutions.
On a sector basis, Materials, Telecommunications and Utilities made just token purchases. Energy remained the biggest player, accounting for 22.1%, followed by Information Technology with 19.7%, and Health Care with 19.4%.
I expect buybacks to remain weak for the foreseeable future, even as earnings are expected to improve. Until sales and profits improve, and for more than one quarter, buybacks will be for the few brave companies that are willing to put their cherished cash flow on the line. As far as the use of the existing treasury shares built up over the past few years,I continue to believe their eventual use will be M&A, whenever companies come to believe it is safe to come out and play again.