To All You Cash-Laden Companies: Where are the Stock Buybacks?
Are corporate treasurers and CFOs in the United States just a bunch of tightwads and misers? Hedge fund manager David Einhorn certainly thinks so: he is urging Apple (AAPL) to create a new class of shares that would pay a dividend yield of 4% and help the company unload some of that pesky $137 billion cash mountain and return it to shareholders (of whom he is, not surprisingly, one). Moreover, Einhorn has filed suit against Apple to block a shareholder proposal that would require a vote permitting it to issue this class of shares. (The company has turned thumbs down on Einhorn’s suggestion.)
A report published this week by Birinyi Associates LLC suggests that Apple isn’t alone in its reluctance to deploy cash on its books to boost shareholder value via dividends or buybacks. Indeed, the research firm found that January 2013 witnessed only $20 billion in buyback authorizations, a 21% drop from the level authorized in the year-earlier period and the weakest month for buyback authorizations since July 2010. If the rate of buyback announcements continues at this clip, authorizations will total only $241 billion this year, compared to $477 billion last year. That flies in the face of pundits who have suggested that with a higher tax rate being applied to dividend income, more companies may choose to be more generous in terms of buying back stock, opting to use that strategy to boost value for shareholders.
Of course, the rate at which those authorizations are acted on can be far smaller. Birinyi Associates reports that $388.5 billion of stock was bought back by U.S. corporations last year, down from $493.9 billion in 2011. While that is higher than the levels recorded from 2008 to 2010, it is significantly below the $761.8 billion seen in 2007 and the $528.3 billion recorded in 2006.
Does it matter whether companies announce and follow through on buybacks? The evidence from last year, see in a stock chart – looking at the stocks that executed some of the largest buybacks – suggests that it does. A number of the companies whose buybacks ranked among the biggest of the year – including Gap (GPS) and American International Group (AIG) – handily outperformed the S&P 500. Even in cases like Johnson & Johnson (JNJ) (which bought back about $12.9 billion of stock last year, the most active repurchaser of its own shares), while the stock lagged the broad market it still ended the year in positive territory. That seems to suggest that monitoring the list of announced buybacks is a worthwhile pastime. You can use the YChart Stock Screener to find companies that have bought back the most stock.
The company that has announced the biggest buyback program so far this year, Marathon Petroleum (MPC) is also one of last year’s biggest buyback participants, having announced a $2 billion program and completed repurchasing about $850 million. At the end of January, Marathon announced another $2 billion repurchase program, and the stock responded by jumping 1.7%. As seen in the chart above, the stock clearly outperformed the market, ending the year 63% higher.
Of course, evaluating whether a stock’s performance is attributable to a buyback or to the stronger fundamentals that make a buyback possible in the first place is tricky. Marathon, for instance, is one of the group of oil refiners and integrated oil producers that have benefitted from an increase in refining margins as they are able to tap into lower-cost supplies of domestic light sweet crude oil. That’s a transformation that is putting more cash in the pockets of refiners everywhere and helped Marathon report a profit of $2.24 a share in the fourth quarter, compared to a loss of 21 cents a share in the year-earlier period.
That has caused Marathon’s cash levels to explode, and triggered the latest buyback announcement. Valero Energy Corp. (VLO), meanwhile, boosted its dividend and hinted at future buybacks.
If investing in a refining stock doesn’t appeal, there are companies that Birinyi Associates reports put in place buyback programs last month. Their ranks include repeat “buybackers” like Gap, Chubb (CB), and Symantec (SYMC), but also include BlackRock Inc. (BLK), sitting on about $4.2 billion in cash, and Lear Corp. (LEA). Sadly for Einhorn, Apple’s name hasn’t joined the list.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.