Dividend increases warm the hearts of investors, but share buybacks do more or less the same thing – and buybacks are rebounding impressively in the United States after a sharp dip in 2009.
According to Standard & Poor’s, buybacks among the companies within the S&P 500 rose nearly 80 per cent in the first quarter of 2010, to $55.3-billion (U.S.), over last year. The number of companies initiating buybacks is also rising, to 251 in the first quarter of this year up from 214 last year.
Buybacks generally lower the number of outstanding shares, which can increase a company’s earnings on a per-share basis. While that might not put money in your pocket the way a dividend does, it can raise the share price.
Some observers combine buybacks with dividends to get a number that represents a fuller benefit to investors. According to S&P, the dividend-and-buyback yield for the S&P 500 is actually 3.4 per cent, which is considerably higher than the index’s 2 per cent dividend yield.
Still, the rising number of buybacks has some room to go. According to S&P, buybacks during the better days for the economy, in 2007, were above $100-billion per quarter. Add in dividend payments to these heady numbers, and the dividend-and-buyback yield fluctuated between 5 per cent and 7 per cent earlier this decade.
“Companies have officially returned to the buyback market; however their purchases appear to be aimed at neutralizing employee options, and therefore are preventing earnings dilution,” says Howard Silverblatt, senior index analyst at S&P Indices, in a note. “Given the record amount of cash on their books, we expect the S&P 500 companies to continue this strategy, even if the market picks up from the current correction mode and puts more options in the money.”
