Share buybacks by U.S. corporations could be back in style this year as an improving economy makes companies more willing to loosen their purse strings to fund transactions that could reward investors with a higher share price.
Repurchases rose solidly through the boom years starting in late 2004 before dropping off in the second quarter of 2008 as the credit crunch prompted companies to hold on to cash.
But the loosening of credit and heightened optimism for an economic recovery are taking hold and buybacks are on the upswing.
It's generally a positive view that the insiders are looking at their own cash flow and saying we've got enough to cover this, said Howard Silverblatt, senior index analyst at Standard & Poor's Indices in New York. But you've got to be confident, especially in this environment.
Analysts caution that just because a company is buying its shares, that doesn't mean investors should. Companies base repurchases less on market timing and more on having the excess cash to fund them.
Retailers have been leading the way in resuming share buybacks.
In a share repurchase program, a company reduces the number of outstanding shares by buying its shares from the marketplace. The roll back in supply can boost the stock's price and makes the stock more attractive by raising the ratio of quarterly profit per share.
It also sends a vote of confidence that the company has good cash flow and thinks its shares are undervalued.
Some believe companies would be better served spending money on acquisitions or other expenses rather than inflating their stock price. Chris Verrone, investment strategist at Strategas Research Partners in New York, expects companies will focus on these efforts to raise revenue rather than buybacks.
Large cap stocks would be good candidates for buybacks this year as blue chips reaped less benefit from 2009's rally while poor quality stocks surged, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Silverblatt said he likes Staples Inc
He expects repurchases to pick up in the third quarter as the economy continues to grow, but if we get that double-dip or a fool's market, companies are going to be more cautious.
After seeing a peak of $171.95 billion spent in buybacks by S&P 500 companies in the third quarter of 2007, levels began dropping off, according to S&P data. In the third quarter of 2009, buybacks totaled just $34.85 billion.
The consumer discretionary and industrials sectors could see a boost from resumptions after seeing the most suspensions, said David Santschi, managing editor at TrimTabs Investment Research in Sausalito, California.
TrimTabs estimates actual daily buybacks are about $800 million, an improvement off the low of $400 million in the second quarter of last year.
It is still far cry from the heyday of the 2000's, which saw a peak of $2 billion a day. As well, most companies are resuming previous programs, rather than starting new ones. Wal-Mart is the notable exception.
A buyback is a boon for existing shareholders, but it should not necessarily be interpreted as the time to buy. Companies are known to time the market wrong.
Target, for example, bought about 95.2 million shares as of the end of the third quarter of 2009 at an average price of $51.42. The shares have underperformed that price. Target shares on Tuesday closed at $51.20, near their 52-week high of $51.76 hit on October 14.
Managers do buybacks for balance sheet reasons, and investors interpret it as market timing and the two can be very different, said Ablin.
(Editing by Leslie Adler)