Stock buybacks in 2007 hit record $589 billion

NEW YORK - Companies in the Standard & Poor's 500 index bought back a record $589 billion of their own stock in 2007 as they looked for ways to spend their cash hoards, S&P said yesterday.

S&P expects the pace of buybacks to slow this year because of concerns about the credit market and the overall economy. Nonetheless, they are expected to remain at historically high rates because of pressure from shareholders and the mountains of cash companies have to spend.

Repurchasing stock takes a company's shares out of circulation, boosting the value of existing shares and fattening profit measured per-share.

While some corporations have borrowed money to finance buybacks, for the most part they are paying with the nearly $3 trillion they have earned in the last five years and now have available.

"These companies are making money," said Howard Silverblatt, S&P's senior index analyst. "This is the payback for them."

S&P 500 industrial companies, a list that excludes banks, still have $616 billion in cash. Silverblatt said companies likely would buy back at least $100 billion in stock each quarter this year, meaning the rate of buybacks would be slower than 2007, comparable with 2006, and much higher than any other year.

Companies are opting for stock buybacks over dividends as the preferred means of channeling cash to shareholders. Buybacks accelerated more than 36 percent in 2007, while dividends climbed 10 percent to $246 billion - less than half the cash spent on buybacks.

Buybacks are more tempting for companies for two reasons, Silverblatt said. Companies typically announce that they plan to buy back a certain number of shares, and once that number is exhausted, the program is over. A dividend, on the other hand, is assumed to be permanent, and shareholders would be upset if the dividend were later cut.

The repurchases were led by several "mega" buybacks. Ten companies - Exxon Mobil Corp., Microsoft Corp., International Business Machines Corp., General Electric Co., Hewlett-Packard Co., the Home Depot Inc., AT&T Inc., Transocean Inc., Pfizer Inc., and Cisco Systems Inc. - repurchased a combined $148 billion in shares last year.

The information-technology sector bought back the most stock. The reason: Many companies in the sector have paid their employees with stock options, Silverblatt said. Once those options are exercised, the companies have to decide whether to buy back stock or allow the total share count to expand.

In a separate development, Novartis AG yesterday lost its "AAA" rating at Standard & Poor's, shrinking the ranks of the world's top-rated industrial companies at S&P and Moody's Investors Service to six.

The number of borrowers with the "AAA" designation, the top rating, has dwindled because companies are sacrificing their credit ratings in favor of boosting their share prices through acquisitions or stock buybacks.

The six remaining borrowers with the highest rating from both S&P and Moody's Investors Service are: Automatic Data Processing Inc., Berkshire Hathaway Inc., Exxon Mobil Corp., General Electric Co., Johnson & Johnson and Toyota Motor Corp., according to data compiled by Bloomberg News.

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Area Share Buybacks

Selected local companies with repurchases in 2007.

Company Amount

Air Products Up to $1 billion

AmerisourceBergen Up to $500 million

Carpenter Technology Up to $250 million

CSS Industries Up to 500,000 shares

Fox Chase Bancorp Up to 327,000 shares

Ikon Office Solutions $295 million

Kenexa Up to 2 million shares

Kensey Nash Up to $25 million

Pa. Real Estate Investment Trust Up to $100 million

PNC Financial Up to 25 million shares

Prudential Bancorp of Pa. Up to 230,500 shares

Rohm & Haas $1 billion

Tyco Electronics Up to $750 million

Universal Health Services Up to 5 million shares

WSFS Financial Up to 630,000 shares

SOURCE: Inquirer research