Buying on the way up, but not on the way down

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Where are they when we really need them?

Companies in the Standard & Poor’s 500 index bought back $89.7 billion of their own shares in the third quarter, 48% less than they repurchased in the same quarter of 2007, new data from S&P show.

The $171.9-billion buyback total in the third quarter of 2007 had been the all-time high for repurchases. After a 3.2% drop in the S&P index in July of that year, many companies probably figured their shares were cheap.

Little did they know how much cheaper stocks would get: From its record closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 now is down 42.5%.

In a perfect world, companies would have the foresight to reserve money for stock buybacks only in bear markets, and avoid buying in bull markets. Corporate CEOs profess that they only make stock repurchases when they believe their shares are undervalued, but their judgment of value obviously leaves something to be desired.

The plunge in stock buybacks in the third quarter of this year, even as share prices declined, wasn’t because companies ran out of cash for repurchases, says Howard Silverblatt, senior index analyst at S&P in New York.

For the S&P 500 companies overall, ‘Cash levels for the third quarter were near an all-time high, so it’s not that companies can’t fulfill buyback programs,’ he said. ‘They are instead choosing to hold on to the cash, unsure of what the near-term may bring.’

You can count even mighty Wal-Mart Stores Inc. in that group now.

The retailer on Tuesday said it would suspend its stock buyback program, despite having $5 billion remaining on a $15-billion repurchase plan its board authorized in May 2007.

Wal-Mart is one of the few stocks showing a gain in 2008: The price was up 16.2% year to date through Wednesday.

One measure of how much S&P 500 companies have favored buybacks: From the fourth quarter of 2004 through the third quarter of this year, the firms spent $1.73 trillion to repurchase stock, compared with $1.87 trillion spent on capital expenditures and $907 billion for cash dividend payments, according to S&P.

-- Tom Petruno