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With stock prices still lagging and many executive stock options well underwater, the momentum behind share buybacks continues unabated. We review trends in buybacks, dividends and leverage, financial policy rationale, and ramifications for investors.
Share buybacks are more popular than ever. Last year 962 companies on the New York Stock Exchange repurchased their own shares, distributing an estimated $149 bn - nearly as much as the $148 bn that NYSE companies distributed as dividends during that year. Historically, companies that buy back their own shares have subsequently posted returns between two and 12 percentage points above the market average, representing bns of dollars in shareholder value.
Share buybacks have replaced dividends as the largest volume mechanism for corporate cash disbursement. Over the past 10 years we have seen U.S. buyback volume more than double in relation to market capitalization, from 0.6 percent of the market value of equity in 1991, to 1.3 percent in Q201 (Figure 1). As a percentage of net income, buybacks represented 14 percent in 1991, 32 to 39 percent in recent years, and are actually 71 percent of Q202 net income.
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