Buybacks Are Back—Big Time

03/17/2010 12:00 pm EST


David Fried

Editor, The Buyback Letter

David Fried, editor of The Buyback Letter, says corporate stock buybacks are booming again, and that’s a good sign for the market and the economy.

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.

Buybacks are at their highest level in two years, 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 on [their] balance sheets.

How much cash are we talking about? JPMorgan estimates that Standard & Poor’s 500 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.

According to Birinyi Associates, in the week through February 26th, $13.2 billion in buybacks was authorized by US 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).

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 International  (NYSE: PM), $12 billion
Lowe’s (NYSE: LOW), $5 billion
Qualcomm (Nasdaq: QCOM), $3 billion
● Retailer TJX (NYSE: TJX), $1 billion
● Game maker Activision Blizzard (Nasdaq: ATVI), $1 billion
Sara Lee (NYSE: SLE), $2 billion
● Networking equipment maker Juniper Networks (Nasdaq: JNPR), $1 billion
Dr. Pepper Snapple Group (NYSE: DWS), $800 million, which boosts its total to $1 billion
ConAgra Foods (NYSE: CAG), $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.

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