The Boom in Stock Buy Backs

Buybacks are booming. Standard & Poor's says that, according to preliminary results, cash-rich companies spent $77.64 billion on share repurchases during the second quarter. That's up 220.9% from the record low of $24.2 billion registered during the second quarter of 2009; up 40.5% from the first quarter of 2010. This now marks the fourth quarter in a row that S&P 500 companies have increased their stock buyback activity.

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Digging into the most recent data, buybacks do remain top-heavy, according to Howard Silverblatt, senior index analyst at S&P Indices, with 20 issues accounting for 50.3% of the buyback activity, down from 59.8% in the first quarter. On a sector basis, Information Technology dominates the buyback market, accounting for 27.3% of all buybacks with Health Care now accounting for 19.0% and Consumer Staples for 18.7%. Both Telecommunications and Utilities remain low-key players at 0.19% and 0.69%, respectively.

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Looking ahead, for the rest of 2010, Silverblatt sees buyback growth and expenditures outpacing dividends. "We also expect companies to spend in excess of $300 billion on stock buybacks for the year, up from the $137.6 billion spent in 2009," he says. Walmart WMT increased its buybacks for the sixth quarter in a row spending $4.15 billion in the second quarter, a new quarterly record for the company. Also of note was Microsoft's MSFT $3.9 billion expenditure (up from $2.0 billion in the first quarter).

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The big underlying driver to this boom in buybacks, says S&P's Alec Young, is the dramatic amount of cash sitting on corporate balance sheets. Specifically, companies in the S&P 500 are flush with cash right now: a record $842 billion, to be exact. “Companies just have a huge amount of cash,” says Young. “So it only makes sense that we now see a variety of things happening: more M&A; dividends being raised; and buybacks. It's what you would expect given the cash backdrop.”

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