(S&P 500 stock buyback story updated for Cisco Systems $10 billion buyback plan) [Chart: Annual stock buyback activity in U.S. equities.]
NEW YORK (
) -- Buybacks are back. Is the 2010 revival in corporate America's affinity for the share repurchase program a good thing for investors?
Buybacks have as many defenders as detractors. Are buybacks a sign of the C-suite winking at investors and sending the silent message that shares are undervalued and management has the stockholder's back? Or is the public face of the buyback masking the fact that much buyback activity is executed to manage corporate insider option packages?
Analysis of buybacks as a potential bullish sign in any stock has to take into account company-specific and macroeconomic factors. It's a mistake to read a buyback as a signal from management that a stock is undervalued. It's unwise to assume the buyback surge is simply low interest rates providing appetizing access to cheap capital.
On top of that, while much has been made of the healthy stock buyback market, it's more accurate to say that the buyback is back from the dead. The 2010 numbers are skewed by the fact that stock buybacks were sucked into a black hole in 2009 (as the chart above provided by market research firm
details). Any resurgence in 2010 was bound to look impressive.
Not that the numbers aren't impressive on a relative basis, though: just under $90 billion in announced share repurchase programs among the Top 10 S&P 500 Index stock buybacks of 2010. S&P predicts that the 2010 total share buyback activity will reach $300 billion. It's just that all things are relative. The $300 billion in buyback activity would compare to $137.6 billion in all of 2009. Also, for all the talk of the stock buyback, there hasn't been one announced share repurchase program in the past five quarters that makes the list of Top 20 all-time largest stock buybacks.
Still, the $90 billion in stock buybacks announced by the Top 10 S&P 500 share repurchase companies in 2010 shows that buyback activity is still top-heavy. The $77.6 billion in second quarter share repurchases was a 40.5% increase over the first quarter of 2010, and 20 companies accounted for 50.3% of the buyback activity in the second quarter; in the first quarter that number was 59.8%.
Within the S&P 500 companies, the buyback activity isn't showing any signs of slowing down either. The latest S&P 500 member to go down the path of increasing its buyback is
, with the technology giant announcing an additional $10 billion to its stock repurchase program on Friday morning. Cisco has good reason to reward shareholders with the short-term carrot of reduced share count propping up earnings, after its third quarter report led to a 17% freefall in Cisco shares last week.
In a statement, Cisco Systems CFO Frank Calderoni said, "Today's decision to increase Cisco's stock repurchase program is part of our continued commitment to return cash to shareholders. We are confident in our strategy, product portfolio and ability to capture and lead new markets." Cisco has previously authorized up to $72 billion in stock repurchases.
So is the stock buyback activity set to squeeze the proverbial lemonade from lemons, with S&P 500 Index flagship market brands trading at historically low P/E multiples? Or will the short-term benefits of spending cash on a stock buyback result in a longer-term souring of per-share growth?
In any event, C-suites are lining up at the lemonade stand to buy back their shares. What follows is a ranking of the Top 10 S&P 500 stock buybacks announced so far in 2010 -- in ascending order of largest dollar amounts -- and some key issues to consider when trying to determine the impact of a buyback program on a stock investment.
(Note: when dollar amounts were equal, buyback programs were ranked by percentage of shares outstanding.)