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