Floyd Norris of The New York Times authored a recent column re-examining a topic we have dealt with before -- dividends and stock buybacks. The column was based on Standard & Poor's (S&P) latest quarterly data on corporate actions to return capital to shareholders. The companies in the S&P 500 Index in the second quarter paid out $47.6 billion in dividends. That was 8% below the amount paid in the first quarter of 2009 and 23% below those paid in the prior year quarter. It was also the lowest quarterly figure for the index since the third quarter of 2004.
The companies in the S&P 500 Index in the second quarter paid out $47.6 billion in dividends
Corporate spending on stock repurchases was worse. In the quarter, S&P 500 members spent $24.2 billion on buying back shares -- 28% below the first quarter spending and down 72% from the same quarter in 2008. The amount spent on buybacks was the lowest for any quarter since S&P began reporting the data in 1998. The conclusion Mr. Norris comes to is that corporations love to buy back their shares when stock prices are high, but are reluctant or don't have the financial resources to buy them back when the share price is low. This would seem to put corporations in the camp of momentum investors rather than value investors.
A money manager who looked at the data suggested corporate stock buyback decisions are really liquidity-driven events. When companies have lots of cash, i.e., balance sheets are very liquid, managers correct the situation by buying shares. When they don't have that extra liquidity, they stop share purchases. In his view buyback decisions have nothing to do with whether managers or boards believe share prices are cheap or dear. If true, then investors should stop evaluating company actions.
A reason why investors viewed stock buybacks as a positive was that it indicated corporate managements and boards were confident that their share prices were undervalued and that the company would not need cash for a possible downturn in their business
Mr. Norris said that a reason why investors viewed stock buybacks as a positive was that it indicated corporate managements and boards were confident that their share prices were undervalued and that the company would not need cash for a possible downturn in their business. As he pointed out, that was not necessarily the case. In the first quarter of 2007 when the first subprime lenders began to go broke, financial companies used almost $34 billion on share repurchases, the most ever for the sector. This year this same industry spent less than $2 billion to repurchase shares during the first six months when share prices were cheap. Further to that point, he cited American International Group (AIG-NYSE), which was the 21st largest spender on buybacks and the fourth largest in the financial sector during 2007, which spent $6 billion. In the first quarter of 2008 it spent another $1 billion, only to be broke and dependent on a federal government bailout six months later.
According to the data in the above chart, energy companies also followed the lead of the rest of corporate America. The one difference is that energy has accounted for the largest share of corporate funds spent on buybacks so far this year, albeit a very small number. Whether that trend will continue is anyone's guess, but maybe energy company execs will prove smarter by buying when their share prices were lower.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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