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July 1, 2011

Corporate Buybacks On the Rise

By James Armstrong

Flush with cash but uneasy about the future, many companies are looking to buy back their own stock, providing one bright spot for brokers who have seen volumes decline in recent years.

Though trading in general is down, buybacks have been on the rise since 2010. Last year, stock buybacks by S&P 500 companies increased 117 percent to $299 billion, up from $138 billion in 2009.

Jeffrey Yale Rubin

During the first four months of 2011, U.S. companies unveiled an additional $195 billion in buybacks, according to research firm Birinyi Associates. More recently, Wal-Mart, Express Scripts and General Electric have all announced buybacks.

"Companies are still concerned about making capital investments, but they have an abundant amount of cash on their balance sheets," said Jeffrey Yale Rubin, director of research for Birinyi Associates. "Buybacks are the way they're going."

Brokerage Cheevers & Co. recently expanded into corporate buybacks, bringing in a new trader who specializes in the space. Brett Klein has joined Cheevers from Northern Trust to help oversee its new corporate buyback service.

Klein is optimistic that buybacks will continue ticking upward, as they have since last year. "We're not quite at levels we were at in early 2007, but right now volume-wise, we're at about the same level as mid-2005," Klein said.

Some companies have mandates requiring that a certain amount of their buyback activity be sourced to woman- and minority-owned firms. As Cheevers is woman-owned, it has an additional attraction for companies making buybacks, according to Klein.

One recent trend is that more company treasurers are setting up pre-arranged trading strategies, which allow them to legally sidestep blackout periods, Klein said. During a blackout period, companies are not ordinarily allowed to buy back their stock.

Corporations have about eight months out of the year when insider trading rules create blackout periods. However, under the SEC's 10b5-1 rule, companies can set up a system to perform automatic stock buybacks during those times.

Treasurers are increasingly seeing these pre-arranged buybacks as a form of risk management, according to Klein. Should a company's stock fall below a certain level, a planned trade will be executed buying back stock on the company's behalf.

Cheevers is now using third-party provider Quantitative Services Group to design custom benchmarks for buyback trading, Klein said. Through QSG, the company can see what the volume-weighted average price is for trades made under the SEC 10b-18 safe harbor rule for buybacks, and then compare that to how clients' trades are actually being executed.

"This benchmark through QSG has been a huge asset for us," Klein said. "It's really showing added value to companies that are focused on execution."

Tim Sargent, chief executive officer of QSG, said his firm is working with the sellside and with companies doing buybacks to ensure best execution. "Increasingly in an era of high frequency trading and questions surrounding trade signaling and other kinds of slippage issues, these corporate managers want to make sure that games aren't being played with the repurchase programs," Sargent said.

A third-party provider can let companies performing buybacks know if costs are in line with the marketplace and whether or not the behavior of a stock is normal during buyback executions, Sargent said.

 

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