Buyback Bonanza Went Into Hibernation, S&P 500 Calculation

Preliminary results show S&P 500 issues spending $48.1 billion in stock repurchases during the fourth quarter of 2008, representing a 66.0% decline over the $141.7 billion spent during the fourth quarter of 2007. For 2008, S&P 500 buybacks reached $339.6

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Preliminary results show S&P 500 issues spending $48.1 billion in stock repurchases during the fourth quarter of 2008, representing a 66.0% decline over the $141.7 billion spent during the fourth quarter of 2007. For 2008, S&P 500 buybacks reached $339.6 billion – a 42.3% drop from the record setting $589.1 billion spent during 2007.

On a sector basis, Standard & Poor’s notes that all groups significantly reduced their buyback activity in 2008 highlighted by an 88.9% reduction posted in Consumer Discretionary. Energy, which accounts for 13.6% of the market value, accounted for 24.5% of the buybacks, with Information Technology (the historical leader) following at 22.8%.

Since the buyback boom began during the fourth quarter of 2004, S&P 500 issues have spent approximately $1.78 trillion on stock buybacks compared to $2.22 trillion on As Reported Earnings, $2.03 trillion on Capital Expenditures and $970 billion on dividends.

“This was the fourth and most significant quarter of reductions in stock buybacks. For the first time since the second quarter of 2004, S&P 500 companies have spent more on dividend payments than stock buybacks,” says Howard Silverblatt, senior index analyst, Standard & Poor’s.

“The need to conserve capital in the current recession, combined with the uncertainty of future cash flow, has made buybacks a high risk component for corporate planners,” continues Silverblatt. “Due to the current market environment, we expect buybacks to remain weak with the potential for companies to use existing treasury shares to satisfy options, as well as smaller M&A.”

Silverblatt’s analysis shows that cash levels for the fourth quarter of 2008 have set a new all-time high, as companies continue to pull back on expenditures, such as dividends, employment, Capital Expenditures and buybacks.

“However, as cash flow decreases, cash levels could also start to decline as actual payments for previously announced layoffs, severances, plant closings and pensions are made,” continues Silverblatt. “Given the current economic realities, it appears that the buyback bonanza has ended, or at least gone into hibernation until the return of better times.”

L.D.

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