Share buybacks among companies in the Standard & Poor's 500 climbed over 22 percent in the first three months of this year versus the prior-year period, a trend that boosted their first-quarter earnings per share by roughly 4 percent, Standard & Poor's said Monday.
S&P 500 companies spent $100.2 billion buying back their own shares in this year's first quarter, the most they've spent on buybacks since the fourth quarter of 2005, when they spent a record $104.3 billion, Standard & Poor's said. A total of 108 companies reduced their diluted shares outstanding by at least 4 percent.
The recent surge in share buybacks comes as companies have built up hefty cash holdings, yet face a lack of attractive investment opportunities.
Earlier this month, media company Tribune Co. said it would go ahead with a $2 billion buyback, while network gear maker Cisco Systems Inc. said it would buy back up to $5 billion of its own stock.
"Given the current cash reserves and associated short-term rewards, the trend and its impact are expected to continue through the remainder of 2006," said Howard Silverblatt, senior index analyst at Standard & Poor's. Over the past 18 months, S&P companies have spent $515 billion to buy back their shares, he said.
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Companies buy back their own stock for several reasons, such as to boost shareholder value by reducing the number of shares outstanding, to reissue shares for mergers and acquisitions, and to cover workers who are exercising their stock options.
But Standard & Poor's said more companies are motivated by a desire to bolster earnings per share, a trend that raises concerns about the quality of earnings and where the company's profit growth is coming from.
"The most relevant question an investor can ask is what the company will do with the repurchased shares," adds Standard & Poor's Silverblatt. Repurchased shares "sit in the corporate treasury, where, subject to regulator timing, (they) can be reissued at the discretion of the company." Paying a premium for a company's stock when growth is coming from interest income and reduced share count "is not acceptable," Silverblatt added.
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