Top 10 S&P 500 Buybacks of 2010

(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 ( TheStreet) -- 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 Birinyi Associates 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 Cisco Systems ( CSCO), 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.)

No. 10 S&P 500 Stock Buyback of 2010: United Technologies ( UTX)

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Shares: 60 million

Value: $4.3 billion

% of Shares Outstanding: 6.4%

Date announced: March 11

Key Fact About Stock Buybacks:

A stock buyback program is best when it indicates active share count reduction, the type of which Exxon-Mobil has made part and parcel of its long-time stock buyback program. Before the second quarter 2010, Exxon had reduced share count through buybacks in 39 consecutive quarters (only proxy requirements related to its acquisition of XTO Energy stopped the stock buyback version of Joe Dimaggio's hitting streak).

Of course, there is protecting earnings by preventing share count from going up, and then there's actively reducing share count, and therein lies a big difference in buybacks, says S&P senior index analyst Howard Silverblatt. The S&P index analyst says that the 2010 share buyback activity deserves the attention it's getting because there has been a shift, but it's the potential for active share reduction that needs to be monitored by investors.

When companies start reducing the shares, the benefit to earnings per share can be calculated. Watch the share count when the earnings start to come in and look for the average number of diluted shares coming down. The average share count coming down shows you that management is doing excess buybacks to bring down the share count and increase earnings. "We need to see companies be more aggressive shareholders," Silverblatt says.

No. 9 S&P 500 Stock Buyback of 2010: ConocoPhillips ( COP)

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Shares: 95 million

Value: $5 billion

% of Shares Outstanding: 6.4%

Date announced: May 11

Key Fact About Stock Buybacks: Exxon-Mobil is the poster child for the stock buyback, but it was only ConocoPhillips that has broken into the S&P 500 Top 10 so far in 2010 among energy names.

Energy stocks, in general, have been among the most resurgent in buyback activity in 2010, notwithstanding the unusual disappearance of Exxon from the energy stock buyback ranks. Energy stock buybacks are up 3,000% percent this year. The increase is huge, but remember it's also tied to the dearth of energy stock buybacks in 2009. The total buyback activity from the sector in 2009 was $432 million, down 98% from the previous year, according to Birinyi Associates data. Energy buyback activity has already reached $13 billion year-to-date in 2010.

So the resurgence in the energy company C-suites in buying up their shares might seem like a hands-down case of an undervalued sector, but the activity this year is still dwarfed by the buyback activity in the 2005 to 2008 period. From 2005 to 2007, the energy sector buyback activity increased from $27 billion to $52 billion annually.

ConocoPhillips shares are also among equities that are yielding more than Treasuries, making repurchase of shares by management an obvious short-term strategy.

No. 8 S&P 500 Stock Buyback of 2010: Gilead Sciences ( GILD)

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Shares: 130 million

Value: $5 billion

% of Shares Outstanding: 14.6%

Date announced: March 24

Key Fact About Stock Buybacks: Many buyback defenders say that the rise in activity is a bullish sign from corporate America; the fact that management is willing to use cash is a sign that conditions are improving. Not so fast, says Birinyi Associates buyback expert Robert Leiphart. The flip side to that argument is to ask why companies aren't increasing dividends or hiring as a way to spend their cash. These capital expenditures would be a more bullish sign. A buyback is only ever going to be a short-term ballast for share price. S&P's Silverblatt says in general, he is more of a believer in the dividend than the buyback as a shareholder-oriented program.

So maybe spending all this cash on stock buybacks isn't such a bullish signal from management. S&P's Silverblatt says companies are by and large holding onto cash, and cautious and concerned about the economy. This will be a telling period news-wise, with companies getting down and dirty with 2011 capital expenditure plans. The buyback activity that's occurred is "required maintenance, painting the bridge as opposed to enhancing it," the S&P analyst says.

Birinyi Associates' Robert Leiphart says one can't ignore the increased use of cash compared to last year. "At least companies aren't sitting on their hands and banks are lending again," the analyst said.

No. 7 S&P 500 Stock Buyback of 2010: Lowe's ( LOW)

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Shares: 216.7 million

Value: $5 billion

% of Shares Outstanding: 14.7%

Date announced: Feb. 22

Key Fact About Stock Buybacks:

So companies aren't spending on hiring or dividends like they are on stock buyback programs. Here's one potential reason for the cynical investor to consider: There is little negative headline risk from a stock buyback program. If a company slashes or suspends a dividend, or announces a big round of layoffs, there's always the risk of negative headlines. Of course, Wall Street analysts loves the layoffs, but Wall Street isn't writing the Main Street headlines about the state of the economy, and no one on Wall Street or Main Street likes a dividend cut.

Companies are getting comfortable spending cash again, and at least in the short-term, stock buyback programs are a relatively risk-free way of spending cash.

Federal Reserve data shows that corporate cash is near an all-time high and so it is incumbent on C-suite executives to look for ways to employ capital. When you look at increasing dividends, hiring or a stock buyback, the buyback is the only option that allows flexibility in that a company can deploy capital, and whether it is three billion over two years or five years, you don't see people saying negative things about it, Birinyi Associates' Leiphart noted, adding, "I've never seen a company get punished for doing a stock buyback."

No. 6 S&P 500 Stock Buyback of 2010: Texas Instruments ( TXN)

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Shares: 300 million

Value: $7.5 billion

% of Shares Outstanding: 25%

Date announced: Sept. 16

Key Fact About Stock Buybacks:

Especially in the technology sector, buyback activity is linked to employee options. In fact, some market analysts quip that buybacks are part of wages at technology companies. For every argument that stock buybacks push earnings higher, market analysts concede that it's hard to argue with the claim that stock buybacks also allow corporate management to keep options in the money. This is one reason why technology companies are always at the head of the buyback class when activity is generally high. Notably, technology companies had more than $100 billion in buyback activity in each year between 2006 and 2008.

In the case of Texas Instruments, it's a standout buyback of 2010 -- and not because it's a technology company, but because of the percentage of shares outstanding represented by its buyback program. Texas Instruments may have been the No. 6 S&P 500 buyback stock based on dollar value, but it's No. 1 in percentage of shares outstanding, at just over 25%.

A company like IBM is always announcing buyback programs, a few a year at 5% each, but for Texas Instruments to announce a 25% buyback program, it's a bullish call on the stock if the company takes 25% of shares out of the market. If revenue stays the same and Texas Instruments is decreasing share count by 25%, that provides buoyancy to earnings per share data. The bulk of stock buyback authorizations are between 5% and 10%, and anything over that is a substantial program. There are few programs in 2010 that equal the Texas Instruments stock buyback.

In fact, in the S&P 500 index, the next highest percentage of shares outstanding in a 2010 buyback is 16%. Outside the S&P 500 universe, of the 10 largest stock buybacks announced in 2010, only 3 were at over 20% of outstanding shares, and none matched the Texas Instruments stock buyback percentage.

No. 5 S&P 500 Stock Buyback of 2010: IBM ( IBM)

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Shares: 61 million

Value: $8 billion

% of Shares Outstanding: 4.7%

Date announced: April 27

Key Fact About Stock Buybacks:

On queue, serial buyback company IBM announced another 4.7% of outstanding shares buyback in 2010. That's just part of the typical prominence of the information technology sector in the latest buyback data. The S&P data shows that information technology continues to dominate in 2010, accounting for 27.3% of all buybacks.

Indeed, serial share repurchaser IBM announced on Tuesday, Oct. 26, that its board authorized another $10 billion in stock buybacks. IBM had about $2.3 billion remaining at the end of September from the $8 billion buyback approved earlier in the year. IBM isn't done yet, planning to ask again at a board meeting next April for more share buyback authorization.

In the third quarter, IBM repurchased $3.7 billion shares, and last quarter share buybacks decreased the IBM shares outstanding by 5%, giving a boost to earnings.

IBM has returned $19 billion to shareholders through share repurchases and dividends since 2003, and the company has spent $68 billion on buybacks since 2002, or roughly 38% of IBM's market value, according to published press reports.

Sector analysis of this year's buyback crop does show some notable changes, though. It's not just the energy resurgence led by ConocoPhillips, but basic materials that has increased by a huge percentage in 2010, according to Birinyi Associates data. Basic materials buybacks have spiked from a low of $425 million in 2009 to just short of $5 billion in 2010 year-to-date. Basic materials and energy were the only sectors with year over year changes of 1000% or greater.

In the basic materials sector, buybacks announced by Praxair ( PX) and Monsanto ( MON) are the standouts. Of course, with its shares down 40% year-to-date, Monsanto management can be expected to give the appearance of standing behind its stock. Praxair, on the other hand, is up 11% this year and trading near a 52-week high.

No. 4 S&P 500 Stock Buyback of 2010: Hewlett-Packard ( HPQ)

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Shares: 263 million

Value: $10 billion

% of Shares Outstanding: 11.27%

Date announced: August 30

Key Fact About Stock Buybacks:

HP has issued debt this year, in part, to fund stock buybacks.

Mergers and acquisitions are a big part of buybacks, too, and it's not just companies buying their own shares to fund acquisitions, but companies protecting themselves from becoming takeover targets.

It's true that companies are sitting on mountains of cash, and in some cases, the cash hoarding is intended for M&A activity. In other cases, if acquisitions haven't panned out or companies haven't found the right target, those mountains of cash can look very attractive as part of a reason to launch a takeover bid.

"With M&A activity picking up, I don't think it's desirable to keep that much cash on hand," says Robert Leiphart of Birinyi Associates. "It makes your company a bigger target, and with lots of deals in the tech world, acquirers are looking for ones that have lots of cash and not a lot of debt," the Birinyi analyst said.

Therefore, companies may move cash off the balance sheet through stock buybacks. In the worst of the economic crisis being strategically positioned with very low debt and a high cash balance made sense, whereas now it may position the company as a very attractive takeover target.

No. 3 S&P 500 Stock Buyback of 2010: Philip Morris ( PM)

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Shares: 256 million

Value: $12 billion

% of Shares Outstanding: 13.5%

Date announced: Feb. 11

Key Fact About Stock Buybacks:

Many investors believe that cash that is taken off the balance sheet for stock buybacks is a waste unless it goes to finance acquisitions or increase dividends.

It's true that a stock buyback may only be a short-term EPS booster, whereas an acquisition can increase EPS to a far greater extent and over the long-term investment time horizon. However, using stock buyback programs to finance acquisitions is ultimately only as good as the acquisition turns out to be.

Another buyback strategy investors should be on the lookout for is when a buyback is made on the heels of poor earnings. Buybacks not only have the ability to lower the average number of diluted shares, but to dilute bad news, poor earnings in particular. If a company is announcing a buyback and burdening itself with a big debt raise to finance the share repurchase, all on the heels of a weak earnings report, it could be a questionable strategy.

No. 2 S&P 500 Stock Buyback of 2010: PepsiCo ( PEP)

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Shares:230 million

Value: $15 billion

% of Shares Outstanding: 14%

Date announced: March 15

Key Fact About Stock Buybacks:

Issuing debt to fund buybacks is a big issue. In the current buyback surge, analysts don't seem overly concerned. There's an old joke among the ratings agencies that if you ask the bond departments what they think of stock buybacks their response can't be printed.

There have been bad examples in the past of companies overextended on the debt side for buyback programs and to turn the tide of bearish sentiment. The publishing industry from a few years back is cited as an example. A few years ago, Home Depot failed to raise the amount of debt it wanted to help fund stock buybacks and it took a beating from investors.

Yet when one looks at the buyback class of 2010, like Microsoft, Hewlett-Packard and PepsiCo, there have been significant concerns voiced about the amount of debt being raised to fund buybacks. These companies are taking advantage of low-cost financing and relatively low trading multiples. S&P's Silverblatt says that HP and PepsiCo are the only example of high-profile S&P 500 stock buyback kings in 2010 that standout for debt issuance.

Bloomberg data shows that PepsiCo sold $4.25 billion of bonds in 2010. On July 20, the company said that earnings per share will grow 11% to 13%, and buybacks may total $4.4 billion in 2010, equaling 3% to 4% of earnings growth.

Microsoft, as another flagship S&P stock, has the cash flow to support both dividend and share repurchase activity without coming in for criticism, says S&P's Silverblatt. Issuing debt and saying that debt proceeds might be used to fund share repurchase activity may just be a matter of Microsoft accountants figuring out the most tax advantageous strategy. And its stock is down 20% this year, so that always makes the surface case for share repurchase activity.

Companies that are less-than-investment-grade and are more concerned that credit lines might tighten up can be expected to pursue debt raises followed by share repurchases. "There lot's more coming in the next few months," says S&P's Silverblatt.

No. 1 S&P 500 Stock Buyback of 2010: Wal-Mart ( WMT)

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Shares: 619 million

Value: $15 billion

% of Shares Outstanding: 16.7%

Date announced: June 4

Key Fact About Stock Buybacks:

Consumer staples stalwart Wal-Mart increased buyback activity for the sixth quarter in a row, according to S&P. Wal-Mart wasn't just No. 1 in total buyback authorization -- 2010 was a re-authorization of an expiring $15 billion buyback program started in 2007. Wal-Mart spent $4.15 billion in the second quarter, a new quarterly record for the company.

--Written by Eric Rosenbaum in New York.

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