Companies cut stock buybacks, but their timing isn't good

ByABC News
March 29, 2009, 10:59 PM

— -- Investors looking for timing tips on when to wade back into the stock market might not want to follow the lead of companies.

Companies in the Standard & Poor's 500 index last year slashed what they spent buying back their own shares to $340 billion, a dramatic 42.3% decline from what they spent in 2007, S&P says. And though it won't be clear until after companies report first-quarter earnings, S&P says it expects buybacks so far this year also to be off sharply.

Investors often look to stock buybacks as a bullish sign, since executives in theory should understand the value of their stock better than anyone outside the company. But investors shouldn't assume companies shying away from buying back stock means they should, too. "I wouldn't take this as a signal stocks are expensive, because they are not," says Jack Ablin of Harris Private Bank.

In fact, data suggest following companies' moves buying back stock is a bad idea because they:

•Often buy stock when it's expensive. S&P 500 companies in 2007 went on a buyback binge, snapping up a record $589 billion of their own shares. However, this massive investment came just as the S&P 500 was about to tumble 38.5% in 2008. And the last time companies loaded up on buybacks was 2000, just before the brutal correction that lasted until 2002.

•Don't have a great track record buying their stock when its cheap. Rather than buying stock up in 2002, as the market bottomed, stock buybacks dried up to $127 billion, their lowest level over the past 10 years, S&P says.

Concern about the ability to keep borrowing money is causing companies to hoard record amounts of cash as they slash jobs and cut dividends in addition to not buying back stock, S&P says. Non-financial companies in the S&P 500 now have $657 billion in cash.

Companies are hoping conserving cash can help them make up for a 40.5% decline in operating earnings last year. "Companies are cutting back everywhere," says S&P's Howard Silverblatt. "Cash flow is king."