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Tickers in this Article: XOM, MSFT, ORCL, GE, MS, WMT, BRK.A
The stock buyback is apparently dead. S&P 500 companies spent just $48.1 billion in the fourth quarter of 2008 on share repurchases, 66% less than the $141.7 billion spent in 2007. For the entire year, $339.6 million was spent, which is 42.3% less than the $589.1 million in 2007. Replacing buybacks is the hording of cash, currently sitting at $656.6 billion, 11.3% of the S&P 500 market cap. In comparison, cash levels were between 2-3% of the market cap back in 1999, when stocks were overvalued. You would think large, financially-sound companies would take advantage of distressed stock prices and buyback their shares on the cheap, but evidently this isn't the case. In fact, just the opposite is occurring and shareholders are paying the price.

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Top Five Stock Buybacks – S&P 500 – Fourth Quarter 2008


Company
Buybacks
Market Capitalization
Exxon Mobil
(NYSE:XOM)
$8.85 billion
$345.82 billion
Microsoft
(Nasdaq:MSFT)
$2.82 billion
$161.19 billion
Oracle
(Nasdaq:ORCL)
$1.84 billion
$89.75 billion
General Electric
(NYSE:GE)
$1.83 billion
$113.84 billion
Morgan Stanley
(NYSE:MS)
$1.74 billion
$26.16 billion
Data as of March 27, 2009
The Price Must be Right
In a PBS interview back in January, Warren Buffett discussed his thoughts about share buybacks, both generally and more specifically, regarding Berkshire Hathaway's (NYSE:BRK.A) lowly stock price. The world's best allocator of capital believes that share repurchases should only take place when a company's stock is significantly undervalued, not when hitting 52-week highs, as the case has been over the last several years. Buffett's criteria for buying back Berkshire stock are twofold: First, it must have cash available, and second, its stock price must be trading below intrinsic value. Since both are true in Berkshire's case, Buffett could be buying right now but isn't because he knows there's better value out there. I wonder if the CEO's of S&P 500 companies know this. (Check out Warren Buffett: How He Doees It, and What Is Warren Buffett's Investing style? for further reading on what Buffett looks for in a company.)

Stock Buybacks are Pointless
I've never understood why companies feel the need to buyback stock. Sure, the earnings per share (EPS) go up and the price-to-sales ratio goes down, but the reality is that nothing changes about the financial health of a company. It still makes what it makes, ratios be damned. A case in point is Exxon Mobil (NYSE:XOM). It's bought back 20% of its stock (approximately $140 billion) in the last five years, averaging $7 billion per quarter. Over this period, EPS increased 176% cumulatively in comparison to earnings before interest and taxes, which grew 156%. The extra 20% cost $140 billion. Couldn't management have done something more appropriate with the cash? Like paying down debt or coming up with alternative energy sources. As Buffett said in his interview mentioned above, companies mostly buyback stock to support the price, which contributes to the performance compensation of senior management. It's no wonder companies have paid out more in buybacks than dividends since the second quarter of 2004.

Bottom Line
In my opinion, most companies do a poor job exercising discretion when it comes to buybacks. Few actually consider stock price when deciding whether to repurchase shares. Today, like sheep, those same companies that jumped on the buyback bandwagon five years ago are now jumping off. Even Wal-Mart (NYSE:WMT) suspended its share repurchase program in December, choosing to preserve cash despite same-store sales growth and a healthy business outlook. In Wal-Mart's defense, its stock at the time was trading close to its 52-week high. While not the only consideration when deciding whether to buyback stock, it obviously pays attention to price, which is more than most large companies do.

For further reading on stock buybacks, what they achieve and what they mean for stockholders, read A Breakdown Of Stock Buybacks.

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