One event impacting the stock market of late has been the high level of stock buyback activity. The heightened buyback activity has not gone unnoticed by many, including Standard & Poor's. In a recent report by S&P titled, S&P 500: Buybacks and Treasury Shares The Overlooked and Hidden Assets, they note:
- Buybacks in 2006 totaled $432 billion.
- 56.8% of the 500 companies reduced their share count.
- Buybacks boosted EPS by at least 4% for more than 20% of the issues in 2006.
- Over the ten quarters between Q4 2004 and Q1 2007, S&P 500 issues spent $965 billion on buybacks, slightly less than the $1,010 billion spent on capital expenditures, and substantially more than the $534 billion paid in the form of common dividends.
- In 2006, S&P 500 companies spend more on buybacks ($432 billion) than the United States government spent on Medicare ($408 billion).
- S&P 500 treasury shares increased 19.7% in 2006.
- The market value of S&P 500 treasury shares is $590 billion higher than their balance sheet posting, and represents 12.4% of the current market value.
S&P notes if the 338 issues with treasury shares made a mark-to-market adjustment to the value of the shares, the market value increase would be $589 billion. The total market value of the treasury shares would be $1,591 billion, representing 17.6% of their market value. For the S&P 500 Industrials (Old) [see S&P report at link below].
The implication for these companies is:
The availability of this discretionary liquid asset, cash and treasury shares, makes almost every company a potential growth issue and many a potential take-over target. What companies choose to do with this enormous asset is perhaps the most important decision facing them, and it could have long-lasting effects as to their profitability and market value for years to come...Buybacks, while adding to short-term returns, are temporary in nature if the shares are not retired - which they have not been. Cash build-ups that are now being used to supplement earnings via interest income and reduce share count are not a substitute for operating earning and, as such, should not be priced into future earnings or multiples.
S&P 500: Buybacks and Treasury Shares The Overlooked and Hidden Assets (pdf)
Standard & Poor's
By: Howard Silverblatt and Dave Guarino
July 19, 2007