S&P 500 companies spent $100.2 billion on stock buybacks during the first quarter of 2006

$515 billion
Amount spent by S&P500 for stock buybacks during the last 18 months

$11.5 trillion
Total market value of S&P500 companies as of May 31, 2006

S&P 500 first quarter buyback activity has surged 22.1% over that of the first quarter of 2005, with the trailing 12- month increase at 55.2%. According to Standard & Poor's, S&P 500 constituents spent $100.2 billion on stock buybacks during the first quarter, placing it second all-time to the $104.3 billion set during the fourth quarter of 2005. 

In the year ended March 31, S&P500 companies spent a record $367 billion on so-called stock buybacks, an amount so large it could cover this year's Medicare budget, says WSJ. Some of the biggest buyers include:

  • Exxon Mobil Corp., Microsoft Corp. and Time Warner Inc. spent $14.37 billion combined during the first quarter. 
  • Cisco's plan to repurchase an additional $5 billion of its stock, on top of its earlier $35 billion repurchase plan.  
95 issues registered share reductions of at least 4% over their first quarter 2005 reported share count, with 108 issues reducing their diluted shares (used for Earnings Per Share calculations) by at least 4%.

Companies take advantage of stock buybacks for several reasons: to reduce their overall share count (thereby increasing current shareholder value), to reissue shares for mergers and acquisitions, and to satisfy employees looking to exercise their stock options. While the re-issuance of shares to cover existing employee stock options is still a major component of buybacks, Standard & Poor's has noted the increasing tendency among companies to reduce their actual share count, and therefore improve EPS.

Standard & Poor's notes that investors need to review company income statements with an eye towards detail. Interest income that increased 38% in 2005 is now expected to increase over 60% in 2006, providing an additional 1.3% boost to corporate earnings. Combined with the impact of share count reduction, initial year-over-year EPS increases can now easily be misinterpreted. "With market volatility increasing, investors need to know where the growth is coming from. Paying 15 to 18 times earnings is acceptable; paying 15 to 18 times earnings for interest income and share count reductions is not," concludes Silverblatt.


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