NEW YORK, Nov. 6 // -- While 2007's record-setting stock repurchasing activity may make it the "Year of the Buyback," a recent Standard & Poor's Equity Research study shows this widely practiced strategy to boost company share prices may not lead to the anticipated positive benefits. In fact, Standard & Poor's Equity Research's look at corporate share repurchases among S&P 500 companies over the last 18 months showed that only one out of every four S&P 500 companies (103 companies) that repurchased shares outperformed the Index, while the remainder would have been better off putting their excess cash into an S&P 500 Index exchange-traded fund. This was among the findings from the Standard & Poor's report titled, "How Rewarding Is Corporate Share Repurchase Activity?" which was published today.
"The tendency is to assume that corporate share repurchases lead to a sustained uptick in stock performance, and the more activity the better," note the study's authors, Stewart Glickman, Associate Director, and Todd Rosenbluth, Senior Associate Director, Standard & Poor's Equity Research. "While these initiatives may create a positive aura around a company's shares, our study showed an inverse link between repurchase activity and the returns achieved - the companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period. Based on these findings, we recommend shareholders take a close look at a company's buyback history and their results before bidding up share prices."
The study reviewed the buyback activity of the companies comprising the S&P 500 for 18 months ending in June 2007, and compared it to stock prices as of the quarter ended September 2007. During this timeframe, 423 companies reported share repurchases. For 77 companies, no repurchase activity was found, and these companies were classified as "zero repurchasers." These companies may have engaged in share repurchases that were insignificant and not disclosed within the details of the company's SEC filings.
"S&P Equity Research undertook this analysis to assess the conventional wisdom on buyback activity and question the decision-making process when using large amounts of shareholder funds for this purpose," said Stephen Biggar, Global Director of Equity Research for S&P. "We believe that share buybacks may sometimes be a subtle admittance by managements that re-investing in their core operations does not represent a good opportunity. Therefore, we are not surprised that some of the most aggressive repurchasers on our list had the worst track records. S&P Equity Research was uniquely positioned to undertake this study given its breadth of coverage, globally consistent fundamental research methodology and demonstrated thought leadership in equity market analysis."
Members of the media can request a copy of the Executive Summary of this report from the communications contact listed at the end of this release.
The analysts quoted above are Standard & Poor's equity analysts. They have no affiliation with any company they cover, nor any ownership interest in any companies they cover.
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