Some Characteristics of Share Buybacks-Or Why Volume Is Drying Up

Lately we have been doing some research into stock buybacks and have come to a few conclusions.

-Probably the most significant finding is that share buybacks, using data on the Russell 3000 universe, have resulted in almost $3 Trillion in shares disappearing from the market. Want to know why we have declining trading volumes over the past several years with NYSE average total volumes dropping -52%? The first culprit is not HFT but instead the great shrinkage in shares outstanding. (Click on chart to enlarge)

NYSE Total Volume

-Between companies buying back their shares, private equity taking companies private, as well as natural selection (at least where the government allows it) and you have several reasons why trading volumes are lower. There is less trading volume because there is less to trade.

-Sadly one aspect of share buybacks that didn’t really come as a surprise was how poorly companies are at valuing their shares. Warren B has said in the past that buying back shares can be a good thing as long as you are not overpaying. Well based on this it is safe to say that corporate America is indeed no Warren B. Management apparently found their companies woefully undervalued at the top in 2007 as they repurchased record amounts of stock and then woefully overvalued at the bottom in 2008. (Click on chart to enlarge)

R3K by month by sector

-It would seem as though many executives have a hard time figuring out how to spend their cash or the debt that they have raised. Instead of investing in their businesses they have decided to just raise the earnings per share by taking shares out of the market. If they were doing it when their stock was cheap it would be a good thing but instead it points, at least to us, as a lack of ideas for real growth.

-Another interesting though maybe not completely surprising thing we found is that the buyback phenomenon is entirely a large-cap thing. When we pulled data for the Dow Industrial’s we found that those 30 companies accounted for 44% of all $3 Trillion that we saw in the Russell 3000. (Click on chart to enlarge)

DJI Buyback by month by sector

-Breaking it down a bit further we found that if you take the top 50 companies by capitalization in the Russell 3000 they account for 52% of all buybacks. The smallest of the top 50 is Northrup Grumman which is a $15.8 Billion dollar company. While some smaller companies do indeed buyback their shares it is largely a large-cap thing.

-Another interesting thing we are looking at is where the buybacks are occurring. Breaking down the cumulative buybacks by sector we can see that technology and financials have seen the majority of the benefits while utilities, telecom, and materials have seen almost none of it. (Click on chart to enlarge)

Russell 3000 Cumulative Buybacks by Sector

Happy Trading,

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