Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Stock buybacks may not help the market much

June 29, 2011 |  2:06 pm

Don’t count on corporate stock buybacks to propel the equity market higher.

Buyback activity among companies in the S&P 500 increased in the first three months of the year, the seventh straight quarterly rise, according to Standard & Poor’s.

But while the $89.8 billion in buybacks was up a whopping 63% from a year earlier, it marked a tepid 4% improvement from the fourth quarter, signaling that further growth may be hard to come by.

“At this point, companies are continuing to use buybacks to control employee options as well as shares used for dividend reinvestment programs,” said Howard Silverblatt, an S&P analyst. “Few companies are venturing outside of the box to purchase additional shares, as was the common practice in late 2005 through mid-2007.”

Companies use buybacks to counterbalance the shares they dole out through employee stock options, thus keeping a lid on their total number of shares outstanding. Companies also use buybacks as an alternative to paying dividends to shareholders.

On a positive note, more companies are buying back stock. According to S&P, 305 did so in the first quarter, compared with 270 in the fourth quarter and 251 a year earlier.

Technology companies, which typically hand out heaps of stock options, were the biggest buyers of their own stock, accounting for 23.4% of all buybacks in the first quarter.

-- Walter Hamilton