As an investor that favors large cap stocks with huge buybacks, the recent news from the WSJ that stock buyback authorizations hit a record in February should garner attention. When was the previous record? In a bad sign for investors, the top previous month of December 2007 was right after the markets peaked in October.
To be fair, cash balances and earnings have grown during the five-year period since the last record providing more capital to return to shareholders. Due to inflation and natural progression some records are always meant to be broken.
Largest monthly authorizations
According to the Birinyi Associates, February had a record $117.8 billion in buybacks announced. This compares to $68 billion in authorizations last year. Interestingly that ranks as the 9th largest month right behind a slew of months in 2007.
The good news for investors is that November 2005 originally set the record without causing a pause in that market rally. Again in July 2006 another record was almost set without sounding a top. Eventually after 6 months in the top 10, the significant buybacks in 2007 helped create a market top. That evidence suggests it takes numerous months and if not years of record months to create a peak in the markets. See chart below:
The data calculated by Birinyi only goes back to 1999, but one can assume prior periods would’ve been much smaller. The regulations allowing for stock buybacks back in the 1980s has only slowly shifted the corporate mindset from dividends to buybacks. Not to mention, corporate balances sheets are significantly larger and stronger compared to prior periods.
Top buyback authorizations
Birinyi provided a list of the largest 10 authorizations in February and it included several stocks such as The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) trading at recent highs. A couple others such as DIRECTV (NASDAQ:DTV) and Time Warner Inc (NYSE:TWX) were previously very aggressive on buybacks.
A key from the list provided is the percentage of the outstanding stock to be purchased. Both GE and UPS announced $10 billion in buybacks, yet that amount only leads to a 4% share reduction at GE and an astonishing 16.7% at UPS. The leader on the list was Home Depot at nearly 18% followed by United Parcel Services, Inc. (NYSE:UPS), Texas Instruments Incorporated (NASDAQ:TXN), DirecTV and Lowe’s.