Buybacks Off the Chart

But are the investors really getting their money's worth?
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Stock buybacks are huge.

Through the first nine months of this year, big U.S. corporations spent a record $325 billion snapping up some of their outstanding shares, according to Standard & Poor's. That's up 33% from the same time last year, and more than double the $130 billion spent on buybacks during the first nine months of 2004.

To put those figures in perspective, consider that total operating earnings for

S&P 500

companies through the end of the third quarter was $590 billion. In other words, the biggest companies spent more than half their earnings power retiring their shares.

The wave of buybacks is a testament to how much cash companies have on their balance sheets, and to the ease with they can borrow money now with rates low. Companies are doing buybacks as away to juice earnings, by reducing the number of shares outstanding, and boost stock prices.

"The numbers are just phenomenal," says Howard Silverblatt, an S&P senior index analyst. "I've been doing buybacks for 19 years, and we've never had anything like this. And it is literally getting larger because companies are being encouraged by institutions and hedge funds to do buybacks."

The list of companies buying back stock includes some familiar and widely held names:

Silverblatt says oil giant

Exxon Mobil

(XOM) - Get Report

has been one of the most prolific share repurchasers, buying up $8 billion in stock in the third quarter alone. Over the past 12 months, Exxon has spent about $26 billion buying its stock.

Companies in the energy sector are the most frenetic repurchasers of stock, accounting for 15% of all buybacks. Next in line comes the financial services sector, with 12%.

In most instances, companies are financing share repurchases with either cash or short-term debt. But in some instances, companies also are using bank loans to gobble up shares. So far, U.S. businesses have raised $12.3 billion in syndicated bank loans to fund stock buybacks, up 32% from last year, according to S&P Leveraged Commentary and Data.

There's no denying all this buyback activity has been great news for stock investors. Shares of companies buying back stock typically rise in the short term. It's one reason hedge funds often agitate for a buyback after sinking their teeth into a company with an underperforming stock and lots of cash and little debt on its balance sheet.

But buybacks can be trouble for bond investors, especially if they're financed with debt. Ratings agencies often take a dim view of debt-financed buybacks, believing the money could be better spent on capital expenditures or acquisitions.

Stock buybacks also can be too much of a good thing if they're being done by a company mainly as a way to boost earnings-per-share numbers.

S&P estimates that 23% of the companies have reduced their share counts through buybacks by 4% or more. The elimination of those shares has led to a corresponding 4% increase in earnings per share. A buyback that takes stock out of circulation can boost a company's earnings per share because there are simply fewer shares to allocate profit to.

Silverblatt says some investors may be overestimating the impact a buyback can have on company's profitability. Over time, he says, stock that is put into a company's treasury often has a way of finding its way back into the market, either through a subsequent stock offering, the exercise of stock options or a merger.

"We do not believe investors fully appreciate the impact that share-count reduction is having on earnings per share," Silverblatt says. "They can come back out again. These shares sit under the full control of management."