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December 16, 2011

Buybacks Rebound From Financial Crisis Lows

Top Stories in 2011

By James Armstrong

Concerned about the future but still flush with cash, many companies sought to buy back their own stock in 2011. Although investments in plants and new hiring was noticeably absent, corporations poured billions back into their own stocks.

This year, buybacks have increased 49 percent, with 2011 on a course to record $540 billion in buyback authorizations, according to Birinyi Associates. That would be the third-highest amount in U.S. history after 2006 ($655 billion) and 2007 ($863 billion).

During the first three quarters of this year, companies actually consummated more than $376 billion in stock buybacks. That already tops the $343 billion in buybacks consummated in 2010 and is well over the mere $156 billion consummated in 2009.

The month of August alone saw 198 new buyback authorizations. The last time the market saw buyback activity that significant was more than three years ago, when corporations announced 199 buybacks in the February before the financial crisis hit.

In September, Berkshire Hathaway announced it would engage in its own buyback plan, a first for the investment company. Walt Disney, JPMorgan Chase, Wal-Mart, Intel, ConocoPhillips and Hewlett-Packard all authorized billions for share buybacks in 2011.

"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."

So far this year, the financial sector has had the largest number of authorized buyback programs, followed by consumer discretionary companies and industrials. Technology companies, however, have authorized the largest amount in dollar terms, followed by companies in the healthcare sector.

Brett Klein, a trader at Cheevers & Co. who specializes in buybacks, said he is optimistic that buybacks will continue.

One recent trend he noted is that more company treasurers are setting up pre-arranged trading strategies, which allow them to legally sidestep blackout periods when they 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 prearranged buybacks as a form of risk management, Klein said. Should a company's stock fall below a certain level, a planned trade will be executed buying back stock on the company's behalf.

Tim Sargent, chief executive officer of equity research company QSG, said his firm is working with the sellside and with companies doing buybacks to ensure they can get 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 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, he said.


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