U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15 percent cheaper than when the credit crisis began.
Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third- highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show. Warren Buffett's Berkshire Hathaway Inc. (BRK/A) bought shares for the first time, and Amgen Inc. (AMGN) sold debt to fund its buyback. U.S. companies spent 70 percent more on their stock last quarter than a year ago, according to financial filings as of Nov. 11.
Market bulls say the rise shows executives are confident the U.S. economy will avoid a recession. While the Standard & Poor's 500 Index peaked the last time buybacks were this high, companies in the gauge are generating three times as much cash, price-earnings ratios are lower and 10-year Treasury yields are around 2 percent, data compiled by Bloomberg show. Bears say the increase means companies lack better uses for capital.
“If the corporate community really agreed on the idea we're heading to a recession, they wouldn't be buying back their stock,” James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $333 billion, said in a Nov. 9 telephone interview. “That says something about their expectations. That's a testament from CEOs, corporate managements saying they are way undervalued and they have a positive outlook on the future.”
CEOs, Economists
Instead of preserving cash, chief executive officers are spending more on their common equity as the European debt crisis prompts economists to cut forecasts for American growth. U.S. companies spent $376.5 billion on repurchases in the first three quarters of 2011, while the median projection for the 2012 increase in gross domestic product has slipped to 1.8 percent from 3.2 percent on Feb. 9, data compiled by Bloomberg and Westport, Connecticut-based Birinyi show.
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The S&P 500 rose 0.9 percent to 1,263.85 last week amid improving economic data in the U.S. Gains were curbed by a 3.7 percent plunge on Nov. 9 as surging Italian bond yields showed an increasing threat from Europe's debt crisis. Futures contracts on the S&P 500 expiring in December climbed 0.1 percent to 1,263.1 at 8:37 a.m. in London today.
Buffett Buyback
Buffett's Berkshire Hathaway, which shunned buybacks for four decades, started a repurchase program in September as the S&P 500 fell a fifth straight month. The Omaha, Nebraska-based company has more than 70 units that haul freight, produce power and sell goods and services from carpeting to insurance.
“We are not in any double-dip recession or anything like that,” Chairman and Chief Executive Officer Buffett said in a Bloomberg Television interview with Betty Liu on Sept. 30, four days after Berkshire Hathaway announced its buyback. “I've got 70-some businesses and most of them are doing very well.”
The Commerce Department reported Oct. 27 that U.S. GDP expanded at a 2.5 percent rate in the third quarter, up from 1.3 percent in the prior three months.
Amgen said Nov. 7 that it will repurchase $5 billion of shares. The Thousand Oaks, California-based company sold $6 billion in bonds to fund the transactions. After topping analysts' earnings projections for eight consecutive quarters, the world's largest biotechnology company raised its 2011 revenue and profit forecasts on Oct. 24.
Boost Earnings
Should Amgen repurchase shares for $57 each, the midpoint of its offer, it would boost 2011 earnings per share by about 11 percent, according to data compiled by Bloomberg using analysts' estimates. The company's stock would have to rise $6.43 to hold its current valuation level, the data show.
“Share buybacks are clearly a flexible way to pay out some of the earnings to shareholders,” Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management, which oversees more than $60 billion, said in a Nov. 9 phone interview. “I especially like it in mature businesses with limited growth opportunity.”
Investors benefit more when executives spend money on equipment to fuel corporate growth or pay out dividends, according to Gregor Smith, a London-based fund manager at Daiwa Asset Management, which oversees $111.3 billion worldwide.
“I'd rather see cash used for investment,” he said in a telephone interview on Nov. 8. “At the end of the day, there is a short-term illusory benefit from having fewer shares in issue.”
Corporate Downgrades
Moody's Investors Service downgraded 19 corporations during the first nine months of the year, in part because of share repurchases. The figure was higher in 2007, with 78 companies cut due to buybacks, dividends or leveraged buyouts.
Executives are funding purchases with debt after yields on investment-grade corporate bonds reached a record low of 3.45 percent on Aug. 4, according to Bank of America Merrill Lynch indexes. Borrowing costs have since risen to 3.69 percent.
“They feel less uncertain about the outlook, and they've been sitting on the cash for so long that eventually pressure mounts for them to deploy it,” Mike Ryan, New York-based chief investment strategist at UBS Wealth Management Americas, which oversees $715 billion, said in a phone interview Nov. 9. “But access to funding is no longer a problem. There's willingness to lend, there's a sense that balance sheets are in good shape and a sense that default rates are going to remain low.”
IBM Buybacks
International Business Machines Corp. (IBM), based in Armonk, New York, has spent $11.5 billion on shares this year, according to data compiled by Bloomberg. The world's biggest computer- services provider said in March that it would buy $50 billion through 2015, representing about 25 percent of its market value eight months ago.
Walt Disney Co. (DIS) began the biggest U.S. plan this year, announcing a $16 billion buyback in May, or 20 percent of its market capitalization, according to Birinyi data. Disney's stock trades at 12.6 times estimated earnings, compared with a 25.4 average since 1980, Bloomberg data show.
“Given where our price is in the marketplace, we always look at buybacks, and given where it has been this quarter, we've stepped that up aggressively,” Disney's Chief Financial Officer Jay Rasulo said Sept. 21 at an event sponsored by Goldman Sachs Group Inc.
Buyback announcements reached $119.8 billion in the third quarter, up 67 percent from a year earlier, as the S&P 500 slumped 14 percent in the biggest drop since the end of 2008, according to data compiled by Birinyi and Bloomberg. Companies spent at least $150.6 billion on their own stock in the three months ending Sept. 30, more than any quarter since the final period in 2007, the data show.
Brazil, Russia
Companies outside the U.S. are also taking advantage of lower prices to buy their shares. Brazilian companies from Sao Paulo-based Tam SA (TAMM4), the country's biggest airline by market value, to Rio De Janeiro-based developer Brookfield Incorporacoes SA announced about 18 billion reais ($10 billion) of share repurchases this year, data compiled by Link Investimentos and Bloomberg show.
In Russia, the lowest yields on debt relative to equities since 2008 have spurred companies including Moscow-based OAO GMK Norilsk Nickel, the country's largest miner, to buy back their own shares with borrowed money.
Cash Flow
S&P 500 companies are producing more free cash flow, or money available for buybacks, dividends or takeovers after capital expenditures, than they were when repurchases were last this high in 2007. The group generated $104.67 a share in the 12 months ended Sept. 30, according to Bloomberg data. That's 3.3 times more than the comparable period in 2007, when a total of $862.9 billion in announcements were made, Birinyi data show.
Valuations are also lower than they were four years ago. The S&P 500 has traded for an average of 14.3 times reported earnings in 2011, 15 percent lower than the same period in 2007. The index fell 57 percent from October 2007 to March 2009.
“The U.S. is still in a very good position,” Kully Samra, who manages U.K.-based clients for Charles Schwab Corp., which has $1.5 trillion of client assets, said in a Nov. 9 telephone interview. “Remember that companies still have huge volumes of cash on their balance sheets. Although we don't believe we'll see robust growth in the near future, the economy is improving. Valuations are attractive.”
--Bloomberg News--
