Annex Bulletin 2007-23 May 23, 2007
A partially OPEN edition
Are We in "Buyback Bubble?" - Analysis of corporate stock buyback trends
Updated 6/18/07, 1:40PM PDT, adds MARKET UPDATE: Record 1st Quarter...
Analysis of Stock Buyback Trends in Corporate America
Are We in "Buyback Bubble?"
S&P 500 Companies Flooding the Market, Turning Nearly All Their Earnings to Wall Street
$2 Trillion+ of New Buybacks Hit the Street since 2001
SCOTTSDALE, May 23 - An erstwhile laggard, the S&P 500 index, set a new all-time high this morning (1532.27 as we write this), surpassing the previous record (1,527.46), set on March 24, 2000, the same month the dot-com bubble burst. The narrower Dow Jones index is also at a record high (13,637, reached May 21).
Time to rejoice and buy some more? Reason to sell and retreat?
The answer depends on what you think is driving this bull market. And we think it's the stock buyback boom, especially among the S&P 500 companies. We have been saying for years that the investment cash flows, not corporate business fundamentals, are driving the stock prices. And the nation's largest corporations have been flooding the market with massive amounts of cash (over $2 trillion of new money into the market since 2001), the S&P data shows.
In fact, they have been turning nearly all of their earnings to Wall Street in the form of buybacks and dividends ($3.3 trillion, or 96% of their $3.7 trillion earnings in 2001-2006 time frame). And if the current trends continue, this year the S&P 500 companies may indeed turn all of them and then some, as they did in 2002, for example (click on right thumbnail to enlarge; click here to see detailed S&P table).
And the trend is accelerating (see "To Buy (back shares) or Not to Buy?," Apr 2007). Less than a week ago, IBM's CFO told us, for example, that IBM intends to buy back another $40 billion-worth of its shares by 2010, on top of the $80 billion the company has already spent on stock buybacks since 1995 (see left thumbnail). Big Blue has been spending about $100 million a day on buybacks, Mark Loughridge said. And that's just one S&P company!
Just to put things in perspective, the amount of money the S&P 500 have been spending on share repurchases is bigger than the total global direct investments in all developing countries, for example (see the right thumbnail chart). And they include China, Russia, India and Brazil (the so-called BRIC countries).
The amount of money the S&P 500 have been spending on stock buybacks is bigger than the entire U.S. healthcare expenses, S&P pointed out in its Mar 15 report. It dwarfs the cost of Iraq war. It boggles the mind...
And just think... not a single S&P 500 product or a job is created as a result. Except, of course, on Wall Street.
In other words, a veritable mountain of money has been poured into the stock market. It is a financial gusher of unprecedented proportion. And that, in our opinion, is the main reason for the current bull market and the record S&P and Dow indices.
When Will "Buyback Bubble" Burst?
If you accept our theory that the stock buyback boom is underpinning of the bull market, then the question is - when will the boom turn to bust? When will the "buyback bubble" burst?
It will burst when corporate earnings hit a rough patch. Dell, for example, our "King of Fluff" for years (see the chart and "Cabbage Patch Dolls of the 1990s," Oct 1998), suspended its buybacks last September when earnings started to slow.
But this presupposes rational behavior on the part of S&P 500 executives. There is no guarantee of that. IBM, for example, said last month it would borrow money (!?) to buy some of its stock back. That's like a homeowner taking out a second mortgage to buy back some of his own property instead of investing in home improvements.
Which means that the stock buyback boom may be with us for some time to come, earnings or no earnings. And with it, the bull market, too.
Once the buybacks start abating, however, it may be time to look for greener pastures elsewhere. There is not much greenery around Wall Street anyway, except for the greenbacks, of course. :-)
Which is why it may be instructive to consider some messages from the above S&P 500 index chart. There have been many booms and bubbles that burst in the last 57 years, as you can see. The March 2000 dot-com one was only the latest. The "buyback bubble" may be the next.
Booms always turn to busts, as you can see, before booming again. The art of circumnavigating the market ebbs and flows requires getting off before a ballooning market bursts. Today, that means tuning in to the S&P 500 action plans.
Happy bargain hunting!
Buybacks Set New Record in First Quarter
S&P Companies Give 92% of Their Earnings to Wall Street
SCOTTSDALE, June 18 - Perhaps not surprisingly, given our earlier reports, stock buybacks set a new record in the first quarter, the S&P 500 researchers reported last week. Share repurchases amounted to $118 billion, up 18% from the $100 billion recorded a year earlier. It was the sixth consecutive quarter of $100 billion or more in stock buybacks.
Over the past ten quarters, the S&P 500 issues have spent over $965 billion on stock buybacks, with 58% of the issues posting fewer shares now then they did when the buyback trend began, the S&P report said.
"With today's higher share prices, the same buyback dollar doesn't buy as many shares and therefore doesn't reduce the share count by as much as it did in previous years," S&P noted.
In other words, they are not getting as big a "bang for the buck" as before.
IT companies continue to be the largest practitioners of share buybacks, disproportionately accounting for 23% of the total buybacks during the first quarter, while representing only 15% of the S&P market value. Consumer Discretionary companies also emerged as a major player in the buyback arena last quarter, accounting for 15% of stock buybacks and 10% of the market value.
The S&P data shows that America's largest companies continue to increase the buyback's share of shareholder returns over the dividends. In the latest quarter, dividends accounted for 30.4% of S&P earnings, while buybacks represented 61.4%, more than double of the 92% of net profit that S&P corporations gave to Wall Street, rather than deploy it themselves inside their own businesses (click on thumbnail to enlarge; click here for a detailed 1Q07 S&P 500 table).
As you have seen from our earlier report, if the current trends continue, S&P companies will be surrendering ALL of their earnings to Wall Street and then some. Which is an implicit admission of ineptitude and lack of creativity by the nation's largest enterprises.
The Greening of Big Blue; Power6 Chip (IBM to spend $1 billion on "going green")
To Buy (back shares) or Not to Buy? - Analysis of stock buybacks in corporate America
IBM Stock Still Grossly Undervalued - A preview of IBM 1Q business results]
Accenture Beats Forecasts, Again -Analysis of Accenture's 2QFY07 results
The Value of pi (π) - Analysis of IBM System p and System i market and product strategies
The (T)ides of March Sink Markets Again - Analysis of global economic & investment trends
Capgemini Caps Great Year, Saves Best for Last (Analysis of Capgemini's fourth quarter business results)
EDS: On Sunny Side of Street (Analysis of EDS' fourth quarter business results)
CSC: Where Less Seems More (Analysis of CSC's third quarter fiscal 2007 business results)
Fujitsu: Sales Up, Profit Down (Analysis of Fujitsu's third quarter fiscal 2007 business results)
IBM Shatters Records (Analysis of IBM's fourth quarter business results)
IBM Stock Passes Century Mark (Analysis of Big Blue's Stock Performance)
Happy Days Are Here Again (Analysis of Top 20 IT leaders' latest stock market and business performances)
Globalization Accelerates (Analysis of United Nation's annual survey of global investments)
IBM: A $125-Stock? (An update to "From Small Acorns Mighty Oaks Grow")
Capgemini: Longest Sustained Stock Price Rise (An update to "By Leaps and Bounds")
HP: New King of the Hill (Analysis of HP's fourth quarter business results)
IBM: From Little Acorns Mighty Oaks Grow (Analysis of IBM's "State of the Union")
Capgemini: By Leaps and Bounds (Analysis of Capgemini's preliminary third quarter business results)
Fujitsu: Good Performance Gets Better, More Global (Analysis of Fujitsu's first half FY2007 business results)
IBM: A Slam Dunk Quarter (Analysis of IBM third quarter business results)
IBM: Services in a Box (Analysis of IBM Global Services' Ground-shifting Announcements)
Strong Comeback by IT Stocks in Third Quarter (Analysis of top 20 IT companies' market and business trends)
Stock Buybacks: A Fading Fad (Dell, erstwhile "King of Fluff," suspends its stock buybacks)
Capgemini: Growth Continues (Revenues, net profit up in double digits, margins also improve)
Power of Manpower (While others move to India, Russia... AMD invests in New York, hailing "phenomenal" quality of its labor force)
Ebb Tide Lowers Most Boats (Analysis of EDS' and CSC's latest quarterly results)
IBM vs. HP: A Tale of Two Blues (Both companies are doing well in business, but only HP is favored by Wall Street; Big Blue trying to change that now with its new "India Opus") [Annex clients click here]