Three of Connecticut’s largest employers led the way in share buybacks last year, when companies in the Standard & Poor’s 500 index bought a record $589 billion of their own stock, S&P reported.
That was about $2 billion more than the S&P 500’s combined earnings in 2007. And the record total underscored the fact that buybacks have become far more popular with cash-rich companies than paying dividends to shareholders.
AT&T Inc., General Electric Co. and Pfizer Inc., each with 7,000 or more workers in Connecticut, were among 10 companies that conducted “mega” buybacks totaling $148 billion in 2007. The three were joined by ExxonMobil Corp., Microsoft Corp., IBM Corp., Hewlett-Packard Co., Home Depot Inc., Transocean Inc. and Cisco Systems Inc.
S&P said it expects the pace of buybacks to slow this year because of concerns about liquidity and the economy. Nonetheless, they are expected to remain at historically high rates.
While some corporations have borrowed money to finance buybacks, for the most part they are paying with the nearly $3 trillion they have earned in the past five years.
“These companies are making money,” said Howard Silverblatt, S&P’s senior index analyst. “This is the payback for them.”
S&P 500 industrial companies — a list that excludes banks — still have $616 billion in cash. Silverblatt said companies will likely buy back at least $100 billion in stock each quarter this year, meaning the rate of buybacks will be slower than 2007, comparable to 2006, and much higher than any other year.
Companies are opting for stock buybacks over dividends as the preferred means of channeling cash to shareholders. Buybacks accelerated more than 36 percent in 2007, while dividends climbed 10 percent to $246 billion — less than half the cash spent on buybacks.
Buybacks are more tempting for companies for two reasons, Silverblatt said. Companies typically announce they plan to buy back a certain number of shares, and once that number is exhausted the program is over. Meanwhile, a dividend is assumed to be permanent and shareholders are upset when it is cut.
