Sunday, April 18, 2010

Stock Buybacks: Actions Speak Louder Than Words

Companies in the S&P 500 Index are once again announcing stock buybacks with an increase in buybacks in the fourth quarter last year. Standard & Poor's reports though, the buybacks are essentially offsetting dilution from employee's exercising stock options. S&P reports that most of the companies that had actual reductions in share count in the 4th quarter were found in the consumer discretionary sector.

In looking at the actual dollars expended on buybacks:
  • $47.8 billion in Q4, 2009, $34.8 billion in Q3, 2009 and $24.2 billion in the record setting low period of Q2, 2009.
  • The high point for buybacks occurred in Q3, 2007 when $172 billion of stock were repurchased by companies.
Source: BusinessWeek

As the above chart notes buybacks are on the increase (red line). A true factor worth watching is a substantial increase in dividends paid. The fourth quarter saw a small increase in dividends paid out over Q3, 2009, $49.04 billion versus $47.21 billion, respectively. Dividend payments are a longer term commitment by companies and signal stronger business prospects than buyback announcements. As the below chart notes, cash is accumulating on corporate balance sheets. Commiting to a growing dividend payment would be a positive sign.

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