The latest data on stock repurchases by companies in the S&P 500 shows a severe year-over-year decline, as most companies conserved cash for what many must have thought was an Armageddon in the financial markets and economy.
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Exxon Buys Big
Standard & Poor's released its quarterly report on stock buybacks for the first quarter of 2009, and as usual, Exxon Mobil (NYSE:XOM) was at the top of the list. The giant oil company spent $7.852 billion buying its own stock back in the first quarter of 2009, more than four times the amount spent by Amgen (Nasdaq:AMGN), which was second on the list with a buyback of $1.997 billion.
Exxon Mobil has now spent $126.903 billion over the last five years purchasing its own stock. This equals its capital budget for the next five years. I've often wondered if Exxon Mobil could break out of its stagnant production growth if the company used its buyback money to explore for oil instead.
Other Top Buybacks
The Standard & Poor's report said that buybacks for the entire S&P 500 index totaled $30.783 billion in the quarter, a drop of 73% from the first quarter of 2008. Sequentially, buybacks dropped almost $18 billion from the last quarter of 2008.
Other names in the top five are IBM (NYSE:IBM), Phillip Morris (NYSE:PM) and Oracle Corp (Nasdaq:ORCL), with buybacks of $1.765 billion, $1.376 billion and $1.360 billion, respectively.
One interesting part of the data is that stock buybacks peaked in the third quarter of 2007 at $171.95 billion. This is near where the overall market peaked, proving once again that the smart money is probably not that smart after all.
Companies have many motivations to institute stock buybacks, some are altruistic and some a little shady. For instance, some companies obsess over quarterly earnings, at the expense of long-term strategy, and buying back stock reduces the share count, which has the effect of boosting earnings per share. Also, companies with large stock option programs use stock buybacks to offset the issuance of shares during the quarter, keeping the share count even.
Another motivation for stock buybacks is to avoid keeping large cash balances on company balance sheets. When a company has a large cash balance, it has the dual undesirable effect of depressing returns on equity, and attracting corporate raiders.
Some companies also use stock buybacks as an alternative to paying higher dividends, which are taxable to shareholders.
The Bottom Line
Recent data from Standard and Poor's reveals that corporations were as scared of the economy and financial outlook as the rest of us during the first quarter, and cut back on stock buybacks drastically. When these buybacks begin to pick up again, it will be a good indicator of higher confidence and a stronger economy. (Learn more about the impacts of repurchases in our article, A Breakdown Of Stock Buybacks.)