Share repurchases are a tool frequently used by public companies to buoy their share prices.  Buybacks are a form of returns to shareholders that do not carry the sting of taxes on dividends.  What may not be generally known is the pervasiveness of the use of share repurchases by public companies.  For example, in the trailing twelve months ending August, 2014 (based on personal research using Capital IQ):

• 404 companies in the S&P 500 engaged in some amount of share repurchases
• 382 companies repurchased more than $10 million of their own shares
• 331 companies repurchased $100 million or more of their shares
• In total, companies in the S&P 500 Index repurchased $550.1 billion in their own shares
• Those repurchases totaled about 36% of the more than $1.5 trillion of cash held by S&P companies at August 31, 2014.  One wonders what the markets would be thinking if there had been more than $2 trillion of cash in the absence of repurchases?

The magnitude of the repurchases for some companies is very substantial.  The following chart from the second article linked below is illustrative:

Yesterday, September 16, 2014, we find two articles, either in the The Wall Street Journal or The Wall Street Journal Online:

• Morning MoneyBeat: Buyback Binge on Last Legs? (September 16, 2014)
• Actual WSJ: Companies’ Stock Buybacks Help Buoy the Market (September 16, 2014)

So which is it, are buybacks on their last legs or not?  My conclusion is that they are not over.  Corporate America accumulates cash when reinvestment opportunities are not good.  One of the concerns in the market is that instead of buying their own shares, companies should be reinvesting in their businesses.  What the business managements may not want to say is that they don’t see the attractive reinvestment opportunities.  So there is a certain dance between managements and the analytical and investment communities following the public markets.

The equity market capitalization of the S&P 500 totaled some $18.5 trillion on August 313, 2014, so stock buybacks of $550 billion for the most recent twelve months represent about 3% of the total market capitalization of the Index.  This just places the magnitude of the buybacks into perspective.

A couple of comments from the articles above are interesting to note:

• Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.
• “There are a couple of reasons why companies do buybacks,” said Jonathan Glionna, head of U.S. equity strategy at Barclays. “One is that it seems to work; it makes stocks go up.”
• “It’s a great tool, but you’ve really got to figure out if it’s the best use of money,” said David Winters, managing member of Wintergreen Advisers, which manages $2.2 billion.
• Chip Gibbs, a managing director at Bank of America Merrill Lynch and head of the firm’s buyback business, said he gets more phone calls from corporate clients wanting to execute buybacks on days when shares pull back.
• Some analysts and traders say stock repurchases can be used to artificially goose per-share earnings and can signal that management isn’t reinvesting as much as it could in the business, potentially shortchanging long-term growth.

The article does not go into detail about the benefits or risks of stock buyback programs, other than to say that they increase earnings per share. And the article didn’t mention that many public companies engage in stock buybacks to offset the creep of increasing shares outstanding from management incentive programs.

Stock Buybacks and Private Companies

My audience is comprised of owners of private businesses.  I’ve long been an advocate of the judicious use of stock buybacks for private companies.  What do these significant repurchases in the public market have to say for private businesses?  Several things, including:

• Stock buyback programs can be good in a number of situations.  If a company does not have attractive reinvestment opportunities, then stock repurchases may be the most productive use of accumulating capital.
• Stock repurchases can provide liquidity for selective owners who may be of different ages and at different points in their career thinking.
• While providing liquidity for selective owners, stock repurchases also reallocate the ownership and increase the relative ownership of remaining owners.  So buybacks can be helpful in stock ownership planning.

The main thing that extensive repurchase programs by public companies do for private corporate America is to provide an umbrella of permission.  Stock buybacks are one tool of corporate finance that is available for both public and private corporate America.

I’ve written about stock repurchases for closely held and family businesses in prior posts, including here and here.  And I write about them extensively in my new book, Unlocking Private Company Wealth.  This book will be available in a matter of weeks.  Please sign up for notification of availability (and sign up for the blog) at the upper right portion of this blog.

Do call me at any time to discuss any valuation or ownership/management transition issues in confidence (901-685-2120).  Or email me at mercerc@mercercapital.com.  I’d love to talk with you.  And feel free to comment on this blog.

Until next time,

Chris Mercer