C&B Notes

Price Always Matters

In general, we are indifferent how a management team allocates capital — whether reinvesting it in the business, issuing a dividend, or buying back stock — as long as they are making the optimal decision for that company based on its specific circumstances.  Repurchasing shares at prices above a business’ underlying intrinsic value destroys per share economic value.  Programs that systematically buy back shares at increasingly higher prices are counterproductive, and companies should instead be at their most active when prices/valuations are low.  Unsurprisingly, S&P’s data shows the opposite pattern during the current market cycle.

S&P Dow Jones Indices announced that preliminary results show that S&P 500® stock buybacks, or share repurchases, increased 8.6% to $128.2 billion during the third quarter of 2013, up from the $118.1 billion spent on share repurchases during the second quarter of 2013.  Compared to the $103.7 billion spent in the third quarter of 2012, buybacks are up 23.6%.

For the 12 month period (ending September 2013), S&P 500 issues increased their buyback expenditures by 15.0% to $445.3 billion from the $387.3 billion posted in the prior 12 month period.  The high mark was reached in 2007, when companies spent $589.1 billion over the 12 month period.  The recession low point for a quarter was $24.2 billion, recorded in the second quarter of 2009.