Buybacks Ramp Up as Optimism Grows

If we take our cues from corporate America by watching what they do with their own money (and we do!), it is evident that corporate leaders feel a sense of optimism about the economic future.

In only the first two months of 2010, they have authorized plans to repurchase $68.5 billion of their own stock, which already amounts to more than half of the $125 billion...

Buybacks Ramp Up as Optimism Grows

If we take our cues from corporate America by watching what they do with their own money (and we do!), it is evident that corporate leaders feel a sense of optimism about the economic future.

In only the first two months of 2010, they have authorized plans to repurchase $68.5 billion of their own stock, which already amounts to more than half of the $125 billion buyback authorization total for all of 2009. In fact, the latest earnings reporting season has been particularly good for buybacks, which have averaged $1.6 billion daily, according to investment research firm TrimTabs.

Buybacks are at their highest level in two year, perhaps signaling that company leaders are no longer fearful of the credit market, and don’t feel compelled to hoard the record levels of cash they had been showing on balance sheets.

How much cash are we talking about? JPMorgan estimates that S&P companies have $3.2 trillion in cash on their balance sheets ($1.1 trillion if you exclude the financial sector). That’s some 11% of assets, which is a 60-year high (the long-term average is 8%).

Deploying this cash for buybacks, dividends, acquisitions and capital expenditures is widely expected, and seen as a long-term thumbs-up to the economy.   

“It’s just a sign that more companies are confident in the economy going forward. Buyback authorizations are cyclical and do tend to move with recessions and expansions,” said Rob Leiphart, market analyst at Birinyi Associates in Connecticut.

The ramped up repurchasing amounts to “a very healthy bean sprout,” according to  David Ikenberry, a finance professor at the University of Illinois at Urbana-Champaign, who has extensively studied corporate buybacks. While that might not be as effusively stated as Fed Chief Ben Bernanke remarking on the “green shoots” of recovery last year (green shoots being any sign of economic growth or recovery), we’ll take it! Green is good.

The tale is told simply in this data gathered by Birinyi: In the week through Feb. 26, $13.2 billion in buybacks was authorized by U.S. corporations, compared to $1.07 billion authorized in the same period a year ago. As Mark Hulbert noted in a recent article on the resurgence in repurchasing, “If new buyback programs are announced at the same pace (as currently happening) for the rest of this year, the total for all of 2010 could be nearly double what was recorded for all of 2009.

Double would be nice, because 2009 was pretty dismal, as far as buybacks go, with just $108 billion announced last year, down from $571 billion two years ago in 2007. (Data from Thomson Reuters).

Researcher Ikenberry says the increasing buyback announcements show that corporations do not see a recurrence of the 2008-09 credit crisis, AND that even if one were to happen, they have the cash to handle it. He observes that they also had significant cash a year ago, but were not confident of being able to access the credit markets, so chose to hoard the money. Logically, then, the mere fact that they are loosening the purse strings now is a huge sign of their overall optimism.

One of the big buyback holdouts remains Apple, which is sitting on $40 billion in cash. Leaders there have said they would rather save the money for acquisitions rather than buybacks or cash dividends.

In the past several weeks, scores of companies have announced new or increased repurchase efforts. A few of the latest to announce stepped-up stock buybacks are:

•    Philip Morris, $12 billion
•    Lowe’s, $5 billion
•    Qualcomm Inc., $3 billion
•    Retailer TJX Co., $1 billion
•    Game maker Activision, $1 billion
•    Sara Lee, $2 billion
•    Networking equipment maker Juniper Networks Inc., $1 billion
•    Dr. Pepper Snapple Group, $800 million, which boosts its total to $1 billion
•    ConAgra Foods Inc., $500 million

We share this corporate optimism. Buybacks are a healthy green sprout pushing out of the warming economic soil this spring.  Naturally we will be looking at these companies and the others that repurchase stock to see if they warrant positions in our portfolios. 

Our success with the disciplined approach we use was affirmed recently by Mark Hulbert of the Hulbert Financial Digest.  In case you missed it take a look at his article at the following web address: http://www.marketwatch.com/story/buybacks-pick-up-a-bullish-sign-2010-02-12

Thank you for using The Buyback Letter as a tool for your investment decisions. And remember, invest for the future—it will be here before you know it.