Corporations awash in cash haven’t exactly been focused on business expansion. Over the past two years, capital goods new orders are down nearly 6% and non-farm hires have inched up just 1%. Share buybacks, however, continue to be a favored use for free cash flow (or in some cases, new debt issues). S&P Dow Jones Indices estimates that S&P 500 companies -- led by Exxon Mobil (XOM), AT&T (NYSE:T) and International Business Machines (IBM) -- spent $99 billion on buybacks in the fourth quarter, and a total of $399 billion for all of 2012. That’s down a smidge from the $405 billion spent on buybacks in 2011, but is still well ahead of the estimated $300 billion spent on buybacks in 2010 and the $138 billion in 2009. (Apparently even the CFO types have trouble with the buy-low, sell-high concept.)
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices noted that most of the activity was to offset share dilution from insiders exercising stock options as well as new issuance. “While [buyback] programs have generally been extended and increased potentially to fulfill the execution of older options now coming closer to expiration (at lower prices), to date most of the companies have shied away from share count reduction.”
That’s an important distinction. Much of the share repurchase activity has been a defensive move to prevent damage -- per share earnings dilution -- rather than as an offensive move to actually reduce outstanding shares. S&P Dow Jones Indices says 203 of the 317 companies that repurchased shares in the fourth quarter actually had a net increase in their shares outstanding. In about half of those instances, the net increase in shares outstanding was more than 1%.
Apple (AAPL) spent $1.95 billion on buybacks in the fourth quarter, the first time since 2006 it had repurchased shares. Seems that was indeed a defensive move, as its total shares outstanding actually rose slightly in the fourth quarter, continuing a longer-term trend no doubt fueled by the exercising of very valuable stock options.
Playing defense is important, but a company that is merely trying to maintain its share status quo isn’t enhancing shareholder value as much as one reducing its shares.
On YCharts, under the "Balance Sheet" dropdown in "Chart Creator" you can drill down on a company’s outstanding shares. (It’s the last item). The five largest repurchasers in the fourth quarter of last year all delivered a net reduction in outstanding shares over the course of the year. They include previously mentioned names and Oracle (ORCL) and Wal-Mart (WMT).
For a broader look at the state of buybacks, go to YChart Stock Screener. Under “Start With” is a button, “Stock Lists,” and it drops down to offer choices. Choose “Indexes” and then, to the right, “S&P 500.” Now go to “Add a Financial Metric,” and drop down, choosing “Balance Sheet.” To the right, under “Metric,” at the very bottom is “Shares Outstanding.” Click on that, and further to the right are more choices. Let’s see how companies have reduced shares outstanding over a 10-year period, clicking on “Growth: 10 Year.”
Click on the header of the column, “Shares Ourstan. 10 Year Growth” twice, and you’ll have a list of S&P 500 companies ranked by how much they’ve reduced shares outstanding on an annualized basis. The companies at the top (with the largest negative numbers) led by Autozone (AZO) and AutoNation (AN), repurchase shares in a big way.
Three very aggressive companies in terms of share repurchase also happen to be among Berkshire Hathaway’s (BRK-B) largest stock holdings.
Only Exxon-Mobil has trailed the market return over that stretch.
DirecTV (DTV), another Berkshire Hathaway holding is also a buyback standout.
DirecTV is also a holding in the $346 million PowerShares Buyback Achievers ETF (PKW) that tracks an index of stocks that have bought back at least five percent of their shares over the trailing 12 months. The top five holdings also delivered a net reduction in shares outstanding over the past year.
The PowerShares Buyback Achievers ETF is making a strong argument for the strategy; over the past five years its 66% total return is double the return of the S&P 500.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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