For 19 years, Howard Silverblatt has been trying to develop an investment model using stock buyback statistics.
Buybacks are soaring. Since Standard & Poor's began collecting buyback data 19 years ago, there have never been buybacks of such enormity in terms of dollar value or S&P 500 companies reducing their shares outstanding or the long stretch of time for such a high pace of purchases, as there have been in the last 12 quarters, said Mr. Silverbatt, senior index analyst, Standard & Poor's, New York.
Buybacks have grown at a pace of at least 20% a quarter during the period.
"Part of the difficulty (of developing a predictable model) is I need more time," he said. "We have been playing with different scenarios. We have something at our fingertips, but we are still playing with it.
"We've been trying to do it for 19 years," starting in 1987 when Mr. Silverblatt started gathering the data on S&P 500 companies. "We're trying to capture an indication that buybacks have predictive value."
Despite the lack of success so far, Mr. Silverblatt said he is continuing to work on the concept as he also continues to track buyback statistics.
"Because of a lack of proof, it is hard to use this (buybacks) in a predictable approach to investing. I wish to be a believer. I'd like someone to come up with an academic model and say, ‘here it is.'"
Exxon Mobil Corp. has been a focus of his attention. "Exxon has reduced shares 25 quarters in a row, ever since it merged with Mobil," Mr. Silverblatt said. "But if I told you the only reason Exxon stock is up is because of buybacks," that would be misleading; there would be other factors, such as oil profits, to consider. "I want to believe buybacks help you (as an investor), but I have no proof of it."
Exxon Mobil, currently the largest U.S. company in terms of market capitalization, at $422 billion, has treasury shares — previously outstanding stock bought back by the company, along with any unissued stock — valued at $145 billion.
The market value of those treasury shares would rank 14th in the S&P 500, or bigger than Google Inc., which ranks 19th, at a market value of $113 billion. "You get an idea of the magnitude of treasury shares," he said.
Buybacks are increasingly important to shareholders because they are "now the favored form of return of shareholder value over that of traditional dividend payments," and have been since the second quarter of 2004, he said.
For the 12 months ended Sept. 30, the S&P 500 companies paid dividends totaling $217 billion, about half the $430.93 billion spent on buybacks, according to preliminary S&P data. Total dividends are up 17% since the last quarter of 2003, when $46.76 billion was paid out. But buybacks are up 185% for the same period, from $38.53 billion in that 2003 quarter.
For shareholders, a gain through dividends is permanent because the money is in investors' hands, while a buyback gain is temporary, until the company reissues the shares, which dilutes earnings, Mr. Silverblatt noted.
In the short term, buybacks benefit shareholders. In the long term, shareholders need to analyze "how good of a track record companies have at (mergers and acquisitions) and integrating companies together" to enhance shareholder value. "Not all M&A works out the way it is supposed to; not all synergies work out positively," he added.
As for the accumulating corporate treasury shares, their currency in the market has problematic utility for companies. "They can't buy a PC with the shares," Mr. Silverblatt said, "but they can buy a PC company."