According to Dealogic, as of June 4, 2010, 310 companies had announced plans to buy back as much as $173.3 billion worth of stocks in 2010. This compares to 253 companies planning $20.3 billion in buybacks at the same point in 2009.
During the first quarter of 2010, non-financial firms in the U.S. held $14.22 trillion in financial assets, according to the Federal Reserve. Cash and equivalents accounted for $1.84 trillion of that amount, the highest quarterly amount on record since 1957 and a 6% increase from a year earlier.
Companies may periodically initiate programs to buy back a certain portion of their shares outstanding. It’s usually done when a firm has a build-up of cash that is not earmarked for reinvestment in the business. Announcements of buyback plans have reportedly been on the rise of late, possibly because managers are waiting to see more strength in the economy before making acquisitions, beginning new projects, expanding staff, or raising dividends. However, share buybacks can also be an attempt by management to mask other activities, such as option issuance dilution, or to boost earnings per share in order to meet forecasts.
When a company announces a stock buyback plan, it does not require the firm to fulfill the plan. Normally, the plan specifies a share or dollar amount maximum, which may or may not be reached. Also a repurchase program could be announced and then not followed through on at all. During the recent economic downturn, many companies suspended previously announced buyback plans.
When shares are repurchased, they can be retired by the company, in which case the number of shares outstanding is decreased and earnings per share is increased (however, net income is unaffected). However, companies may also use repurchased shares to fund employee option and benefit plans or in the acquisition of other firms.
What can an investor gain by tracking share repurchase activity?
When looking at buyback activity for the market as a whole, statistics on activity rising or falling can signal confidence (or a lack thereof) in the future prospects for the overall economy since companies are willing to spend a portion of their “financial cushion”—their cash reserves. It also typically means that executives think their company’s stock is attractively priced.
For individual stocks, whether a share repurchase program can be viewed as a positive sign depends on why it is being initiated as well as on the underlying health of the company. Some investors seek out firms that have recently announced buyback plans because they believe the stock price will rise, but this is typically a short-term result.
This is a monthly online investment advisory newsletter published by Forbes. Fried developed a buyback formula that he combines with a value investing approach to issue buy, sell, and hold recommendations.
The service tracks the major corporate buyback announcements, but focuses on only those firms that actually buy back a significant number of their shares. Recommendations are based on analysis of company fundamentals. Requirements include the potential to double in price in two to four years, a good business story, good management and a current buyback program already underway.
Portfolios offered include the 10-Stock Buyback Income Index, 20-Stock Buyback Index, High-Tech Sector, Health and Bio-Tech, and 5-Stock Buyback Dogs.
E-mail notices are sent when each new issue of the newsletter is available. In addition, weekly e-mail hotlines are sent out with trading instructions for all portfolios.
For more active traders, Fried offers the Buyback Letter Premium Edition. It reports on a Buyback Premium Portfolio that consists of only the five buyback stocks that are outperforming currently.
A subscription to David Fried’s Buyback Letter costs $24.95 per month or $195 per year. The Buyback Letter Premium Edition is $79 per month or $699 per year.
The Online Investor provides data on corporate announcements, including a list by date of recently announced stock repurchase programs, accessed by clicking on Buybacks from the home page.
Listed by date of announcement, with the most recent announcements first, the plan information for each stock includes company name and ticker, the number of shares or total dollar amount of the buyback plan, and length of the plan and whether it involves a prior buyback plan. Several months of announcements are available in the archives.
This is an exchange-traded fund that tracks the Buyback Achievers Index, which is administered by indxis (www.indxis.com) and published on the Amex exchange under the ticker DRB. The index consists of domestic, exchange-listed companies that have repurchased 5% or more of their outstanding shares for the trailing 12 months.
To view the current holdings of the PowerShares Buyback Achievers ETF, go to the PowerShares website and type the ticker symbol PKW into the search box. Next to Links, click on Fund holdings to see a complete list of the stocks in the ETF. The list can be downloaded into a spreadsheet.
S&P’s quarterly press releases summarize buyback activity in stocks that make up the S&P 500 index. The total dollar amount of repurchases and the percentage increase or decrease from the previous quarter are presented, with interpretation from S&P analysts. Repurchase activity among sector groups is also commented on.
StreetInsider.com is a financial news analysis service that focuses on market-moving events. Searching on the term “buybacks” brings up a page with the latest news on buyback activity in the market and individual company buyback announcements. An archive of news on share repurchase plans goes back more than one year. You can subscribe to an RSS feed to receive updates on the buyback page. Members subscribing to the premium content for $29 per month can sign up to receive e-mail alerts on stock buyback news.