A Nice Prop for Stocks in 2013: Buybacks

by Dan Burrows | December 18, 2012 1:29 pm

[1]Share buybacks are all the rage these days. And while we usually criticize companies for repurchasing their own stock when it’s expensive rather than cheap, to their credit, corporations have shown some restraint as the market closed in on a five-year high.

The good news is that leaves a lot of buyback firepower in reserve to help boost share prices next year. The bad news is that companies might just keep wasting good cold hard cash buying back their own stock at elevated prices.

As much as buybacks and big new repurchase plans are in the news, lots of giant companies still have billions of dollars in authorizations laying fallow, waiting to be deployed.

For example, JPMorgan Chase (NYSE:JPM[2]), the nation’s biggest bank by assets, has a $15 billion share repurchase program underway, which it announced last March. However, at the end of the second quarter, the bank still had more than $13 billion left to deploy on buybacks, according to FactSet, using the latest available data.

Interestingly, as much as companies have been almost falling over themselves to announce new repurchase programs — and as much as buybacks have driven the bull market since 2009 — companies aren’t pulling the trigger so fast these days when it comes to dipping into the market.

Walt Disney (NYSE:DIS[3]) still has more than $12 billion left in its repurchase program, according to the latest figures from FactSet. Investors in PepsiCo (NYSE:PEP[4]) and Hewlett-Packard (NYSE:HPQ[5]) are waiting on the companies to come into the market with in excess of $9 billion in buybacks apiece. Microsoft (NASDAQ:MSFT[6]) had more than $8 billion left under its authorization, while Wal-Mart (NYSE:WMT[7]) had more than $7 billion waiting for deployment.

Indeed, as of the end of the second quarter, companies in the S&P 500 had almost $470 billion worth of shares available for repurchase under existing buyback plans. And that was before a slew of names came out with new programs.

Just this week, Coca-Cola Enterprises (NYSE:CCE[8]) and Eli Lily (NYSE:LLY[9]) announced $1.5 billion in share buybacks, respectively, while Boeing (NYSE:BA[10]) resumed its own share program, of which $3.6 billion is still unused.

At InvestorPlace, we usually prefer dividends to share repurchases when it comes to returning cash to shareholders, if only because most companies are so boneheaded about buying back their own stock.[11]

But it is indeed nice to know that there’s so much corporate buying power waiting in the wings. As we noted recently, buybacks are what’s driving the bull market in stocks[12], not retail and institutional investors, according to the well-regarded president of Yardeni Research, Ed Yardeni.

A vast reduction in supply — not increased demand — is what’s boosting the equity market, by Yardeni‘s reckoning. This chart, courtesy of Yardeni Research, does show that buybacks have gone vertical since 2009 — just like the S&P 500:


However, the chart also shows that buybacks pretty much flatlined in the four quarters ended June. Indeed, at the end of the second quarter, buyback activity declined 11.5% year-over-year, according to FactSet.

No wonder companies have so much buying power left.

It’s kind of comforting to know that companies haven’t squandered cash on their own shares as the market closed in on a five-year high. And that the market should have some kind of floor in 2013, if only because companies have plenty of cash sitting around, waiting to prop up their own share prices.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. [Image]: https://investorplace.com/wp-content/uploads/2012/12/201213YearEndLogo185.jpg
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  3. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  4. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  5. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  6. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  8. CCE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCE
  9. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  10. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  11. boneheaded about buying back their own stock.: https://investorplace.com/2012/12/dont-celebrate-a-rush-into-to-stock-buybacks/
  12. buybacks are what’s driving the bull market in stocks: https://investorplace.com/2012/12/morgan-stanley-unchained-on-buyback-talk/
  13. [Image]: https://investorplace.com/wp-content/uploads/2012/12/buybacks.jpg

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