Stock buybacks down: Should we worry?

— -- Even while investors are getting excited about stocks, companies are choosing to keep cash rather than buy their own shares.

Companies in the Standard & Poor's 500 spent a record low $24.2 billion on stock buybacks during the second quarter of 2009, S&P said Tuesday.

That's the lowest since S&P started tracking the data in 1998. It's also a 72% decline from the amount spent in the same quarter last year.

Some investors might worry that companies haven't bought into a rally that has stocks at their highest point in 11 months. Tuesday, the Dow Jones industrial average added 57 points to 9683, widening its gain this year to 10.3%.

But analysts say the fact buybacks are falling isn't necessarily a bad sign, because companies are:

•Historically lousy market timers. Buybacks surged in 2007 to a record $589.1 billion, just as the stock market was peaking and about to fall into one of the worst bear markets in history.

Prior to that, in 2002, companies slashed buybacks to their lowest level all decade just as stocks were cheap and the market was bottoming.

In fact, about 60% of companies doing buybacks since 2000 have lost money on them, says Mike Gumport, founder of corporate finance advisory firm MG Holdings/SIP, based on a study of more than 200 mostly tech firms.

"Company management tends to be bullish at the wrong time and pessimistic at the wrong time," says Jack Ablin of Harris Private Bank.

•Looking for ways to boost cash levels. Buybacks were so popular in 2007 that some companies even borrowed money to buy stock. But now that debt is viewed so skeptically and cash is treasured, skipping buybacks is an easy way to boost reserves, says Dan Seiver, finance professor at San Diego State University.

Industrial companies in the S&P 500 are clinging to $702 billion in cash, up from the $630 billion average since 2004, says S&P's Howard Silverblatt.

•Leery of investor backlash from buybacks. Investors are skeptical of buybacks because they can benefit executives and employees holding stock options, Ablin says. Meanwhile, long-term shareholders tend to gain the least from buybacks, especially compared with dividends that could have been paid instead with extra cash, Gumport says.