Share repurchase, or stock buybacks, are on a roll. USA Today reported preliminary data from Standard & Poor's that in the fourth quarter of 2010, stock buybacks increased 80% from the same period last year. Companies bought back $86 billion of their own stock, up from nearly $48 billion in the fourth quarter of 2009. They bought about 9% more of their own stock in the fourth quarter than the third.
This month, Well Fargo & Co. announced its board had increased its authority to repurchase the company’s common stock by an additional 200 million shares. Last month, VMware, Inc., a leading virtualization company, announced that its Board of Directors authorized the purchase of up to $550 million of its Class A common stock through the end of 2012. Stock, the release stated, will be purchased from time to time, in the open market or through private transactions, subject to market conditions. The Company expects the equity purchase program to help partially offset dilution from its equity programs. This is the second stock repurchase VMware has done. Its current $400 million stock repurchase program is anticipated to be completed this March.
David Sterman, writing for TopStockAnalysts.com., counted more than 30 companies that have announced plans to buy back at least $1 billion in stock since late October.
This was the sixth quarter in a row that S&P companies have increased their stock buyback activity, according to an earlier S&P release. Stock buybacks for the third quarter of 2010 had increased just above 128% to $79.56 billion from the $34.85 billion registered during the same period of 2009. That share in repurchases represented a 2.5% increase over the second quarter of 2010.
Howard Silverblatt, Senior Index Analyst at S&P Indices called this activity
"a strong, positive sign for the overall health of the market."
But the number of companies taking part in a stock buyback program has leveled off, according to S&P, with 261 companies purchasing their shares during the third quarter of 2010 compared to 257 in the second quarter and 251 in the first quarter. On a sector basis, Information Technology continues to dominate, accounting for 28.6% of all buybacks (up from 27.3% in the second quarter), with Health Care declining significantly to 13.4% from 19.0% last quarter. Energy increased from 4.0% of all buybacks to 6.4%.
The main advantage of a stock buyback for investors is that it means fewer stocks in the open market and thus a higher value for those stocks, as well as a greater percentage of equity in the company. In addition, a company that has the excess cash for a stock buyback can be safely assumed to not have cash flow concerns. But analysts recommend caution in putting too much stock in buybacks. For example, a stock buyback does not address any weaknesses in the company’s business model. Another question to keep in mind is whether a stock buyback is an indicator in corporate confidence in the company’s growth, or, as USA Today questioned, whether the money is being used to, for example, pay employees cashing in their stock options. Or are CEOs reaping the benefits of stock option gains and increases in earnings per share at the risk of investment in new projects?
Are stock buybacks positive or negative? From timing to intent, it is recommended to investigate what is behind the strategy.