GO
Loading...

Big buyback year ends with a bang, but news is not all good

Tuesday, 17 Dec 2013 | 10:38 AM ET
Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

Capping a big year for dividends and buybacks are Boeing and 3M, both of whom gave markets an early Christmas gift.

Boeing announced a $10 billion buyback and 50 percent increase in its dividend (to $0.73 a share). Meanwhile, MMM says they will hike their dividend by 35 percent. The company has also been aggressively buying back stock, amounting to about four percent of the company's market cap this year.

Last week, MasterCard announced a 10-for-1 stock split, 83 percent dividend increase, and a $3.5 billion stock buyback program.

Boeing's buyback boost
The "Squawk on the Street" news team discuss Boeing's authorization of an additional $10 billion a share repurchase plan.

The moves by Boeing, 3M and Mastercard follow an encouraging investor trend. Dividend payments in the S&P 500 will hit a new record this year: $310 billion (versus $282 billion in 2012).

That's good news, but remember: companies have tons of cash, so that increase is not as impressive as it seems. The dividend payout ratio (how much you are paying out as a percentage of the profits) remains low by historical standards. The current payout ratio for the S&P 500 is 36 percent on a Generally Accepted Accounting Procedure (GAAP)-earnings basis, according to Morningstar.

The good news is that is the highest payout ratio for the index since 1999, and a big improvement over 2011 when it was 29 percent--an all-time low. Dividends are growing faster than per-share earnings.

The bad news: it is still well below the 53 percent median annual payout ratio that was seen for the S&P 500 between 1946 and 1994.

Still, there's more good news: as a sector, industrials are really paying out. After the hike, MMM's dividend yield will be close to 2.7 percent. Boeing will be close to 2.2 percent. Buybacks are also on a roll, but you have to watch the number of shares being bought back, versus the number of new shares issued (largely in stock options).

The criticism of buybacks is they announce a purchase, but then issue more shares on the other end, mostly because of stock options.

That's why you watch Share Count Reduction. You want to buy back more than you issue, obviously. The good news, according to S&P, is that is exactly what is happening. For the third quarter, that metric in the S&P 500 edged down 0.58 percent. S&P is estimating that 2013 buybacks will top $482 billion, well above the $399 billion for 2012. Both of those figures, however are well below 2007, the record year for buybacks with $589 billion.

One caveat: because share prices are up roughly 25 percent from last year, if you want to buy back the same number of shares as last year you need to pay 25 percent more.

Here are the companies with the largest buybacks in Q3:

Apple $4.9 b

Pfizer $3.8 b

Halliburton $3.3 b

Qualcomm $3.3 b

J&J $3.0 b

Source: S&P

Elsewhere

Fed survey: Taper timeline
CNBC's Steve Liesman reveals the latest result from a CNBC survey which shows how much the Fed is likely to reduce its QE program and when.

1) Monday heralded more impressive economic news...most notably a new high in industrial production and a multi-year high in capacity utilization. As ISI noted this morning in a research note, "The recovery has been slow, but the tortoise may win the race." There have been recoveries in several indicators, including retail sales and U.S. corporate profits (a record).

Overseas news has been strong as well: euro zone PMIs and the Tankan survey (the quarterly poll of business confidence conducted by the Bank of Japan) have also been strong.

That doesn't mean we keep going straight up. The main point for these last few weeks is traders want to protect their gains for the year...that means many have protection against any notable drops. Of course, this is a contrarian indicator: more good news will force traders to cover their positions.

Short-term volatility is up. The Dow goes up 129 points yesterday and the Volatility Index (VIX) goes up as well? Yes. But look carefully: the spot and near-term contract is up, but readings further out are flat, suggesting the uncertainty around the Fed meeting tomorrow. The VIX curve is inverted, with the short term contract is higher than the longer-term contract.

The way I see it: the Fed is eager to begin unwinding its monetary stimulus due to an improving growth outlook, but the VIX is signalling that there will be some short-term volatility around the event.

2) The last of 2013 IPOs pricing tonight: AMC Entertainment (AMC), one of the world's largest movie screen chains (343 theaters with 4,937 screens), scheduled to price tonight, offering 18.4 million shares at $18-$20. They are owned by the Wanda Group, a Chinese real estate company.

By CNBC's Bob Pisani

  Price   Change %Change
S&P 500
---
US 10-YR
---
BA
---
MMM
---
MA
---
AAPL
---
PFE
---
HAL
---
QCOM
---
JJSF
---

Featured

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street