Recently, corporate America has been faced with a problem. The basic rate of interest is so low that companies don’t have many options as to where to put their profits and excess cash.
Currently, businesses are not reinvesting the cash into new growth projects or acquisitions as feverishly as they have in the past. Nor are they paying out dividend distributions, because this does not improve a company’s long term outlook. Instead firms have turned to share repurchase programs, giving rise to the term ‘the great shrinkage’.
You’ll also notice Bank of America Corp (NYSE:BAC), which has incurred a disproportionate rise the number of its shares. From what’s left, we can see the total number of shares in issue across the 24 remaining DOW components, has fallen 7.05%. Including all companies apart from Bank of America, the number of shares in the index has fallen 6.13%.
Falling number of shares
| Company | Q1 2013 shares in issue (billions) | 2012 | 2011 | 2010 | Change |
|---|---|---|---|---|---|
| Travelers Companies Inc (NYSE:TRV) | 0.377 | 0.386 | 0.415 | 0.476 | -20.80% |
| Hewlett-Packard Company (NYSE:HPQ) | 1.94 | 1.97 | 2.09 | 2.32 | -16.38% |
| International Business Machines Corp. (NYSE:IBM) | 1.11 | 1.14 | 1.2 | 1.27 | -12.60% |
| Intel Corporation (NASDAQ:INTC) | 4.95 | 5 | 5.26 | 5.56 | -10.97% |
| The Home Depot, Inc. (NYSE:HD) | 1.47 | 1.5 | 1.56 | 1.65 | -10.91% |
| Pfizer Inc. (NYSE:PFE) | 7.19 | 7.44 | 7.82 | 8.04 | -10.57% |
| Wal-Mart Stores Inc. (WMT) | 3.3 | 3.37 | 3.46 | 3.66 | -9.84% |
| Cisco Systems, Inc. (NASDAQ:CSCO) | 5.3 | 5.4 | 5.56 | 5.85 | -9.40% |
| UnitedHealth Group Inc. (NYSE:UNH) | 1.02 | 1.03 | 1.07 | 1.12 | -8.93% |
| Exxon Mobil Corporation (NYSE:XOM) | 4.49 | 4.63 | 4.87 | 4.89 | -8.18% |
| The Walt Disney Company (NYSE:DIS) | 1.8 | 1.82 | 1.91 | 1.95 | -7.69% |
| American Express Company (NYSE:AXP) | 1.11 | 1.14 | 1.18 | 1.2 | -7.50% |
| AT&T Inc. (NYSE:T) | 5.5 | 5.8 | 5.9 | 5.91 | -6.94% |
| McDonald’s Corporation (NYSE:MCD) | 1 | 1.01 | 1.03 | 1.07 | -6.54% |
| The Procter & Gamble Company (NYSE:PG) | 2.74 | 2.75 | 2.8 | 2.9 | -5.52% |
| Microsoft Corporation (NASDAQ:MSFT) | 8.36 | 8.4 | 8.49 | 8.81 | -5.11% |
| JPMorgan Chase & Co. (NYSE:JPM) | 3.82 | 3.81 | 3.9 | 3.96 | -3.54% |
| The Coca-Cola Company (NYSE:KO) | 4.46 | 4.5 | 4.57 | 4.62 | -3.46% |
| 3M Co (NYSE:MMM) | 0.691 | 0.693 | 0.708 | 0.713 | -3.09% |
| General Electric Company (NYSE:GE) | 10.37 | 10.52 | 10.59 | 10.66 | -2.72% |
| Merck & Co. Inc. (MRK) | 3.02 | 3.04 | 3.07 | 3.1 | -2.58% |
| Chevron Corporation (NYSE:CVX) | 1.96 | 1.97 | 2 | 2.01 | -2.49% |
| United Technologies Corporation (NYSE:UTX) | 0.901 | 0.895 | 0.892 | 0.907 | -0.66% |
| Johnson & Johnson (NYSE:JNJ) | 2.75 | 2.75 | 2.75 | 2.75 | 0.00% |
| Verizon Communications Inc. (NYSE:VZ) | 2.87 | 2.85 | 2.83 | 2.83 | 1.41% |
| DuPont Fabros Technology, Inc. (NYSE:DFT) | 0.942 | 0.942 | 0.941 | 0.921 | 2.28% |
| The Boeing Company (NYSE:BA) | 0.766 | 0.761 | 0.753 | 0.744 | 2.96% |
| Caterpillar Inc. (NYSE:CAT) | 0.671 | 0.6696 | 0.666 | 0.65 | 3.23% |
| Alcoa Inc (NYSE:AA) | 1.07 | 1.07 | 1.06 | 1.02 | 4.90% |
| Bank of America Corp (NYSE:BAC) | 11.15 | 10.84 | 10.25 | 9.8 | 13.78% |
| TOTAL S.A. (ADR) (NYSE:TOT) | 85.948 | 87.2566 | 89.345 | 91.561 | -6.13% |
Which company has produced the best returns?
It’s all very well and good knowing which companies have brought back the largest amounts of shares, but it is more important to know how this has affected investor returns.
It is often the case that the biggest buyback programs do not offer investors much due to the huge number of shares in issue for the company involved. For example, Lorillard Inc. (NYSE:LO) is one of the smaller companies in the S&P 500 and its buyback program amounts to about $500 million a year.
However, over the past three-years the company has reduced its number of basic shares in issue by 37%. In comparison, Johnson & Johnson (NYSE:JNJ) bought back $12.9 billion of stock during 2012 and did not make a dent in the total number of shares it had in issue.
So these are the three companies from the chart above that have achieved the best returns for investors.
| Company | Basic shares in issue 2010 | Basic shares in issue Q1 2013 | Net income Q1 2013 | Q1 2013 EPS based on 2010 shares in issue | Q1 2013 EPS based on current shares in issue | Change | Period average stock price | Shares repurchased | Total returned to investors |
|---|---|---|---|---|---|---|---|---|---|
| The Travelers Companies
| 476 | 377 | $896 | $1.88 | $2.38 | 26.3% | $60 | 100 | $5,940 |
Figures in millions except for per share figures
Over the past three years, Travelers has spent $5.94 billion repurchasing stock, reducing the number of shares by 26.3%. Which happens to be the amount the company would have driven EPS by if its income had not grown.
| Company | Basic shares in issue 2010 | Basic shares in issue Q1 2013 | Net income Q1 2013 | Q1 2013 EPS based on 2010 shares in issue | Q1 2013 EPS based on current shares in issue | Change | Period average stock price | Shares repurchased | Total returned to investors |
|---|---|---|---|---|---|---|---|---|---|
| International Business Machines (NYSE:IBM) | 1.27 | 1.11 | $3.3 | $2.6 | $2.97 | 14.4% | $160 | 0.160 | $25.6 |
Figures in billions except for per share figures
IBM is a favorite company for investors as it returns nearly all of its net income to shareholders through both dividends and buybacks. The company has repurchased 160 million shares since 2010 (at a total cost of $25.6 billion), improving EPS by 14.4%. That works out to be around 6% a year, without the impact of rising income.
Effectively, if IBM traded on the same earnings multiple during the past three years the company’s shares would have risen 6% a year.
| Company | Basic shares in issue 2010 | Basic shares in issue Q1 2013 | Net income Q1 2013 | Q1 2013 EPS based on 2010 shares in issue | Q1 2013 EPS based on current shares in issue | Change | Period average stock price | Shares repurchased | Total returned to investors |
|---|---|---|---|---|---|---|---|---|---|
| Intel
| 5.56 | 4.95 | $2.45 | $0.40 | $0.45 | 12.3% | $21.7 | 0.610 | $13.2 |
Figures in billions except for per share figures
Lastly, Intel has bought back 610 million shares since 2010 at a total cost of $13.2 billion. This has driven up EPS by 12.3%, excluding the effect of variations in the company’s income. If the company traded continuously on the same earnings multiple, then the stock would have risen about 3%-4% a year excluding the company’s current 4% dividend yield.
