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 anannual 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…
Of course, two years later in the depths of the financial crisis the story was a tad bit different. (link)
But now, four years after the record setting pace we saw in 07, the buyback spree is back at full spigot. Of course, this is an excellent way to boost earnings PER share, especially for slower growth companies who don’t have many other uses for the excess cash and hence are ‘growing’ via this method rather than operationally. Also, corporations can use buybacks to offset the large option offerings executed each quarter (and accounted for on Wall Street as one time events – wink wink). Further, money is so cheap for our largest corporations (thanks Ben!) that some are borrowing simply to retire shares.
Net net, when buybacks start reaching these levels, it does have an impact on the greater market as sizeable chunks of shares are retired. Bloomberg looks at the most recent data:
- U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15 percent cheaper than when the credit crisis began.
- Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third- highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) bought shares for the first time, and Amgen Inc. (AMGN) sold debt to fund its buyback.
- U.S. companies spent 70 percent more on their stock last quarter than a year ago, according to financial filings as of Nov. 11.
- While the Standard & Poor’s 500 Index peaked the last time buybacks were this high, companies in the gauge are generating three times as much cash, price-earnings ratios are lower and 10-year Treasury yields are around 2 percent, data compiled by Bloomberg show.
- U.S. companies spent $376.5 billion on repurchases in the first three quarters of 2011.
- 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, which oversees $111.3 billion worldwide. “I’d rather see cash used for investment,” he said. “At the end of the day, there is a short-term illusory benefit from having fewer shares in issue.”
- Executives are funding purchases with debt after yields on investment-grade corporate bonds reached a record low of 3.45 percent on Aug. 4, according to Bank of America Merrill Lynch indexes. Borrowing costs have since risen to 3.69 percent.
- Walt Disney Co. (DIS) began the biggest U.S. plan this year, announcing a $16 billion buyback in May, or 20 percent of its market capitalization, according to Birinyi data.
- Buyback announcements reached $119.8 billion in the third quarter, up 67 percent from a year earlier, as the S&P 500 slumped 14 percent in the biggest drop since the end of 2008, according to data compiled by Birinyi and Bloomberg. Companies spent at least $150.6 billion on their own stock in the three months ending Sept. 30, more than any quarter since the final period in 2007, the data show.