February 10, 2009 / 10:13 PM / 11 years ago

Buyback halts may spell more trouble for Wall St.

By Ellis Mnyandu - Analysis

NEW YORK (Reuters) - If the rising tide of suspended share buyback programs is any indication, corporate America is now in survival mode.

The deepening recession is not only forcing U.S. households to live within their means, but corporations too.

The list of companies putting their share buyback plans on hold since the start of 2009 has raised concerns that the stock market could be in the throes of losing a key underpinning.

The amount of announced share repurchases so far this year is less than one tenth what had been announced in the same time period last year.

Bellwethers 3M Co (MMM.N) and Altria Group Inc (MO.N) are among companies that have said they would rather conserve cash this year.

Strained credit markets have made it tougher for corporations to borrow, driving companies to conserve cash for more urgent uses and drying up a source of funding for share purchases.

“The suspension of buybacks hurts the market,” said Eric Kuby, chief investment officer at NorthStar Investment Management Corp. in Chicago. “Corporations are basically saying we’re taking this conservative approach, we’re conserving our cash.”

The latest bit of bad news arrives as Wall Street attempts to recover from an 11-year low reached in November. Buybacks serve as crucial underpinnings of market psychology and sentiment, according to analysts.

“The buybacks have totally fallen off,” said Howard Silverblatt, senior index analyst at Standard & Poor’s in New York. “The companies are shy about commitment. We’re seeing companies pulling back in order to conserve cash.”

Around this time last year, corporate America had more than $63 billion of share repurchases announced, but through February 5 there have been $4.32 billion of announced buybacks, according to data from market research firm Birinyi Associates.

The benchmark S&P 500 .SPX is down more than 40 percent since hitting a record in October 2007, and down more than 8 percent since the start of 2009.

With share repurchases, companies tread a fine line between returning wealth to shareholders and maintaining a sufficient financial cushion.

Credit rating agencies often take a dim view of share buybacks, because of the constraints they place on cashflow and because of the reliance by some companies on debt to fund the share buybacks.


The current buyback squeeze didn’t just begin in January. The suspension in share buybacks picked up pace in the fourth quarter, with announcements from other bellwethers including Alcoa (AA.N) ,Starbucks (SBUX.O) and Walt Disney Co (DIS.N), which have all been smarting from the effects of the economic downturn.

Wal-Mart Stores Inc (WMT.N) ,the world’s largest retailer, in early December said it had suspended its share repurchase program “as a result of the current economic environment and instability in the credit market.”

Even companies in the most defensive sectors, such as Altria, are scaling back share buybacks.

For its part, Philip Morris (PM.N), the cigarette maker that was spun off by Altria, forecast the amount of share repurchases in 2009 to be similar to what it spent last year.

Other companies that recently said they were scaling back repurchases include AT&T (T.N) , which last month said it did not see significant share repurchases in 2009, and exchange operator NYSE Euronext NYX.N ,which on Monday said it would halt share repurchases to preserve capital after posting a big quarterly loss.

The suspensions may also mean that companies are willing to forgo giving shareholders any bottom-line windfall in the near term. Share repurchases reduce the amount of shares outstanding, which helps boost earnings per share and tend to support higher stock prices.

But unlike a company slashing a dividend, some investors tend to be somewhat forgiving about tinkering with share repurchases as the first option when the going gets tough.

“A share repurchase suspension is certainly a psychological negative as it says the company doesn’t have the confidence to get out there and buy their own stock,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

“But by the same token, there’s a certain amount of understanding that maintaining a strong balance sheet through the worst of the economy is primary, whether it means cutting dividends, or employees or a buyback suspension.”

Editing by Leslie Adler

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