All Those Stock Buybacks: A Bullish Sign?
In what may be a vote of confidence in the economy and their own business prospects, companies have authorized spending more than $453 billion to buy their own stock this year, putting 2011 on track for the third-highest annual total behind 2006 and 2007, data compiled by Birinyi Associates show.
Some analysts view the increase as a sign that companies can’t find anything better to do with their money amid economic weakness. Yet bulls say the rise shows executives are confident the U.S. economy will avoid a recession, which looked far more likely midyear. “If the corporate community really agreed on the idea we’re heading to a recession, they wouldn’t be buying back their stock,” says James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $333 billion.
Warren Buffett’s Berkshire Hathaway, which shunned buybacks for four decades, started a repurchase program in September with no set target as the Standard & Poor’s 500-stock index fell for a fifth straight month. The company is a proxy for the U.S. economy: Berkshire businesses haul freight, produce power, and sell goods and services from carpeting to insurance. “We are not in any double-dip recession or anything like that,” Chairman and Chief Executive Officer Buffett said on Bloomberg Television on Sept. 30, four days after Berkshire Hathaway announced its buyback. “I’ve got 70-some businesses, and most of them are doing very well.”
IBM has spent $11.5 billion on shares this year, according to data compiled by Bloomberg. The computer services provider said in March that it would buy $50 billion of shares through 2015. Berkshire Hathaway has disclosed a $10.9 billion investment in IBM shares. Walt Disney began the single biggest U.S. plan this year, announcing a $16 billion buyback in May, equal to 20 percent of its market value, according to Birinyi data.
With interest rates near record lows, some companies are even borrowing money to buy their own stock. Amgen said on Nov. 7 that it was buying $5 billion of shares, part of a $10 billion program. The company sold $6 billion in bonds to fund the transactions.
Buybacks can benefit investors because by reducing the number of shares in the market, they boost a company’s earnings per share. “Share buybacks are clearly a flexible way to pay out some of the earnings to shareholders,” says Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management. “I especially like it in mature businesses with limited growth opportunity.”
Investors benefit more when executives spend money on equipment to fuel corporate growth or pay out dividends, according to Gregor Smith, a London-based fund manager at Daiwa Asset Management. “I’d rather see cash used for investment,” he says. “At the end of the day, there is a short-term illusory benefit from having fewer shares in issue.”
Executives have faced criticism from shareholders and analysts in the past for launching buybacks when stock prices were high. The last buyback binge, in 2007, took place as stocks were starting an epic fall. The S&P 500 dropped 57 percent from October 2007 to March 2009. Today, valuations are lower than they were four years ago. The S&P 500 has traded for an average of 14.3 times reported earnings in 2011, 15 percent below the same period in 2007. Disney’s stock traded at 12.5 times estimated earnings on Nov. 15, compared with a 25.4 average since 1980, data compiled by Bloomberg show. “Given where our price is in the marketplace, we always look at buybacks,” Disney Chief Financial Officer Jay Rasulo said at a conference on Sept. 21. “And given where it has been this quarter, we’ve stepped that up aggressively.”