Saturday, September 22, 2012

Strong Stock Buyback Activity in Q2

Standard & Poor's recently reported the buyback data for the S&P 500 Index for the second quarter. Noted in their release is buybacks increased 32.5% in Q2 versus Q1. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices noted,
"The last time we have seen this level of activity was during the pre-recession heydays of 2005-2007. While the second quarter produced a broad decline in the equity markets, companies used the quarter to increase holdings, reduce share counts, and add a tail-wind to their eps during a quarter which set an operating record for profits."
From The Blog of HORAN Capital Advisors
Notable buyback amounts in the quarter were:
  • Johnson & Johnson (JNJ): $12.9 billion
  • AT&T (T): $2.6 billion
  • American International Group (AIG): $2 billion
Investors need to analyze 3Q earnings reports carefully in order to determine the reasons behind potentially higher EPS that may be reported. S&P also noted they are seeing over 80 companies increase buyback activity in Q3. This lower share count will artificially inflate reported EPS. Reviewing a companies absolute earnings should be a focus of investors. Factset recently noted,
"So far, 103 companies in the index have provided guidance for the third quarter. Of those, 80% have guided  below Wall Street consensus estimates, according to John Butters, senior earnings analyst at FactSet. That’s the most negative outlook since FactSet began tracking the figures in the first quarter of 2006."

Disclosure: Long JNJ

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