New Buyback Wave May Boost Shares

10/19/2010 10:57 am EST

Focus: MARKETS

David Fried

Editor, The Buyback Letter

David Fried, editor of David Fried’s Buyback Letter, says low rates and a huge cash hoard are encouraging companies to buy back shares at a ferocious pace, supporting higher share prices.

As an investor, are you still wondering if you need to be in cash? We hope not.

We have been advising you to stay invested, even during difficult times, and that advice stands.

You must continue to focus on the comparative value of stocks vs. bonds. You can barely get any interest on your cash. If you buy a ten-year Treasury note, for example, your money will earn less than 2.7%, with no chance of growth and a good chance of seeing it shrink from inflation.

If you buy a stock that gives you that yield or higher, you have a good chance of seeing an increasing dividend and increasing your principal.

Twenty-five percent of all the companies in the Standard & Poor’s 500 have dividend yields that exceed the ten-year Treasury. There are more than 130 companies in the S&P yielding 2.7% or more. In fact, in August, more companies in the S&P 500 paid dividends that exceeded the average interest rate on corporate bonds than any time in at least 15 years, according to Bloomberg.

Now that credit has loosened a bit, company execs are feeling more confident in deploying that cash. And many companies have even been borrowing additional cash at attractive rates to purchase their own shares.

After a slowdown since the torrid pace set in 2007, US companies once again have a voracious appetite for their own shares, and have been buying back with vigor. S&P 500 stock buybacks for the second quarter of 2010 increased 220.9% to $77.64 billion from the record low $24.2 billion registered during the second quarter of 2009. [It’s also] a 40.5% improvement over the first quarter of 2010, and is the fourth quarter in a row that S&P 500 companies have increased their stock buyback activity

During the second quarter of 2010, 257 companies participated in stock buyback programs, up from 251 in the first quarter of this year and 214 that participated in the fourth quarter of 2009.

For the rest of 2010, [Howard] Silverblatt said S&P expected buyback growth and expenditures to outpace dividends. He expects companies to spend more than $300 billion on stock buybacks for 2010, up from the $137.6 billion spent in 2009.

So, while cash has given companies the flexibility they needed to react to opportunities (acquisitions, etc.), and to survive a downturn in business, if ever there was a time for solid companies to repurchase, it seems to be now, when shares are devalued, and there is no reward for hoarding cash.

Bottom line: Buybacks are attractive, stock shares are a good value at present, and investors need to keep their eye on the long-term prize–not only today’s yield, but tomorrow’s potential appreciation.

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