Buybacks Are Back In Style, But Actions Speak Louder Than WordsHoward Silverblatt
It’s difficult not to have noticed, buybacks are back in style. Companies are rushing to show how solvent they are, and prove to the world that they have weathered the recession storm, by no better a way than buying back their shares – which at the current level, the logic would follow to say, is at a bargain, otherwise why would companies buy them. But before investors jump on the band wagon they need to look a lot closer at the announcements – most of which are a reauthorization from the Board of Directors to senior management that they can now again go back into the open market and do buybacks, depending on market conditions. That willingness to reauthorize is a positive sign, but the actual trades have yet to appear. While Q4 saw a 37.2% increase in buybacks from the depressed Q3 level, the full year 2009 posted a 59.5% decline from 2008 and a 76.6% decline from 2007. What we have seen to date is that companies are matching their buybacks with their employee option exercising, therefore preventing earnings dilution, which is a relevant item. This has typically been the use for buybacks, followed by M&A and then SCR (Share Count Reduction). I found 50 issues within the S&P 500 that had SCR in Q4 (notable in the Consumer Discretionary sector), but otherwise the actual share count has gone up, even if you remove the Financial sector (which increased 20%). Overall, investors first have to decide if the buybacks are actually happening, then if they are, what their use is for – prevention of earnings dilutions or SCR.
Then of course, there is the continuing debate of buybacks, which on the short run increases buying pressure (and price hopefully), helps EPS, but keeps the shares in the company hands, verses dividends, which puts the money in the hands of investors, who if they like the company can use the DRP (Dividend Reinvestment Program) to buy more shares, verses, of course, the pure plowback theory that the company can best decide how to use the money.
A link to the full Q4 2009 S&P buyback report, including related notes on dividends, cash, CapX and the recent Health Care tax reversal charge is below Download file