By Hilary Johnson
Bloomberg, 2006-09-05
U.S. companies are spending record amounts of money on their shares, and the repurchases may help stocks exceed the five-year highs reached earlier in the year.
Microsoft Corp., the world's largest software maker, bought back $3.8 billion of stock last month. Realogy Corp., the real- estate broker spun off from Cendant Corp., offered last week to pay as much as $736 million for some of its shares.
The offers followed $116 billion of repurchases in the second quarter, the most ever, according to Standard & Poor's. Buybacks announced in 2006 already exceed the record amount for a full year, according to Birinyi Associates Inc., a money- management and research firm. Record levels of cash and relatively low interest rates have spurred buying.
``Supply's shrinking,'' said Kenneth Fisher, chairman of Fisher Investments Inc. in Woodside, California, who oversees $32 billion. ``That's got to be bullish.''
Stocks rose last week as data on inflation, job growth, manufacturing and consumer confidence reinforced the Federal Reserve's view that economic growth is slowing gradually.
The S&P 500 ended the week 1.1 percent below this year's peak of 1325.76, reached May 5, when the index climbed at the highest level since February 2001. U.S. markets were closed yesterday for the Labor Day holiday.
Reports tomorrow may provide more evidence that the economy is meeting the Fed's expectations, suggesting policy makers may be done raising interest rates after 17 increases in two years.
Advisers' Optimism
The Institute for Supply Management may say banks, builders, retailers and other service companies expanded last month, according to a survey of economists by Bloomberg News. Productivity probably rose in the second quarter at a faster pace than first reported, another survey showed.
Speculation that the Fed won't lift rates sent optimism about U.S. stocks to a five-week high, according to the latest survey by Investors Intelligence, a New Rochelle, New York-based financial newsletter.
The number of bullish newsletter writers rose during the week ended Aug. 25 by 2.1 percentage points, to 42.1 percent. Bearish, or pessimistic, writers fell to 33.7 percent, a six-week low, from 34.7 percent.
The S&P 500 advanced 1.2 percent last week to 1311.01. The Dow Jones Industrial Average added 1.6 percent to 11,464.15 and the Nasdaq Composite Index increased 2.5 percent to 2193.16.
$40 Billion Plan
Microsoft has risen 20 percent since June 13, when the S&P 500 reached its low for the year. The Redmond, Washington-based company announced plans in July to repurchase $40 billion of stock, including $20 billion through a tender offer.
Investors tendered only $3.8 billion of shares. To make up the difference, Microsoft boosted its repurchase program to $36 billion on Aug. 18. That day, its stock gained 4.4 percent, the most in a month.
Realogy, the company behind the Coldwell Banker and Century 21 real-estate brokerages, offered to buy as many as 32 million shares on Aug. 28. The company agreed to pay $20 to $23 a share in the so-called Dutch auction, allowing shareholders to set the price they will accept. The offer expires on Sept. 26.
A week earlier, Realogy authorized a buyback plan for a maximum of 48 million shares. The company, based in Parsippany, New Jersey, said the purchases may add as much as 10 percent to earnings per share next year.
`Being Pushed'
U.S. companies spent 16 percent more on their shares during the second quarter than in the prior three months, according to Howard Silverblatt, a senior index analyst at S&P in New York. They also beat the record of $104 billion set in last year's fourth quarter, S&P data showed.
Buyback announcements in the first eight months of 2006 totaled $507 billion, up 88 percent from the year-ago period, according to Birinyi, based in Westport, Connecticut. The full- year record of $470.7 billion had been set last year.
Boeing Co., the world's second-largest maker of commercial aircraft, said on Aug. 28 that it would buy back as much as $3 billion of shares. Amazon.com Inc., the world's biggest online retailer, authorized $500 million in repurchases that day.
Companies are making these plans after amassing record amounts of cash. S&P 500 members had $614 billion available as of Aug. 30, according to S&P, whose total excludes utilities and financial and transportation companies.
``They're being pushed to do something with the money,'' Silverblatt said. Buybacks enable companies to return cash to shareholders without committing themselves to future payments, as dividends do.
`Too Cheap'
Relatively low interest rates have also been a boon for buybacks, Fisher said. S&P 500 companies will earn $87.17 per ``share'' this year, about 6.6 percent of the index's current level, according to the average estimates of analysts surveyed by Thomson Financial. Ten-year U.S. Treasury notes, a benchmark for borrowing costs, yield 4.72 percent.
``What they're really saying is that the cost of the stock is too cheap relative to the cost of borrowed money,'' he said, referring to companies.
Repurchases can increase per-share earnings by reducing the amount of stock outstanding. Analysts see profit growth slowing through the second quarter of 2007, providing an incentive to make repurchases.
After surging 16.3 percent in the second quarter, S&P 500 profits will rise 14.3 percent in the third, 13.4 percent in the fourth and 11 percent in next year's first quarter, according to Thomson. Second-quarter profit is projected to rise 8.9 percent.
`Lack of Confidence'
``Companies buying back their own shares may well reflect a lack of confidence,'' said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, who helps manage $150 billion. ``They feel they don't have any good investment opportunities.''
Announcements don't always lead to purchases. Since 2000, companies have bought only 65 percent of the shares they said they would, according to Birinyi's data.
Still, many investors can't help but be optimistic about what the increase in buybacks may mean for the market.
``How much can you shrink the denominator before it explodes the price?'' asked Kevin Bannon, who helps manage $116 billion as chief investment officer at Bank of New York. ``We're getting closer and closer to that point.''
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