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US Companies Tap Cash Piles For Share Buy-Backs

US companies are signalling a desire to buy back their own shares at the highest rate in months as record levels of cash pile up on balance sheets.

Companies announced 27 new buy-back programmes last week totalling $18.5bn, the most since February, according to data from TrimTabs. Walmart alone announced a $15bn plan, which included $4.7bn from a previous programme.

Sheet of US one hundred dollar bills
Don Farrall | Digital Vision | Getty Images
Sheet of US one hundred dollar bills

“We’ve seen a pretty big decline in share price, so companies are trying to prop them up, and these announcements are one way they can do that,” said David Santschi, an analyst at TrimTabs. “The spike is highly unusual for June, which is not an earnings announcement month. That’s a bullish sign.”

So far in 2010 there have been 343 new authorisations for $178bn in buy-backs, according to Bank of America Merrill Lynch . If carried out, and projected over a full year, it would be the highest volume since 2007, or $898bn. Last year, there were only $128bn-worth of buy-backs. Other US companies announcing $1bn-plus buy-backs in June were CVS Caremark , Viacom and Monsanto .

Companies so far in 2010 have been cautiously exercising their right to buy shares. They are keen to maintain a large cushion, as rating agencies are closely watching cash balances as credit markets tighten.

Jonathan Golub, an equity strategist at UBS, said that while the “absolute level of buy-backs will grow, relative to cash generation, the growth will be disappointing”.

Share purchases per day are estimated to still be well below 2007’s peak of $3.2bn. Buy-backs represented only 34 per cent of company cash in the first quarter of 2010, the lowest level in a decade, according to UBS.

“If the pressure from shareholders and analysts wasn’t there, companies would continue to squirrel away cash until there’s a clearer picture,” said Michael Thompson, managing director at S&P Valuation and Risk Strategies.

Cash available for buy-backs is at all-time highs as companies have cut costs and allowed inventories to shrink. The Federal Reserve last week reported that US companies, excluding financials, hold $1,840bn in cash, the highest level as a percentage of assets since the 1960s.

Share buybacks remain the preferred way to return that cash to shareholders, because they are more flexible than dividends, which must be paid regularly, and are typically better received by investors than acqusitions.

“Buybacks are a signal that management is being cautious with its capital, not squandering it on empire building,” said Brad Thompson, fund manager at Frost Investment Advisors.

Share buybacks also help to boost earnings per share, which are a key determinant of executive pay, by reducing shares outstanding.

Companies are not at the point of borrowing to finance share repurchases, as was common in 2007. In that year, payouts represented more than 100 per cent of balance sheet cash, according to UBS.

“Companies are not bearish, but not dramatically bullish like they were at the market peak,” said Chip Gibbs, managing director in equity capital markets at Bank of America Merrill Lynch.

Issuance of new shares has meanwhile remained depressed, which in theory makes share buybacks more effective at increasing demand for shares, and thus price. While buybacks were peaking last week, there was only one IPO from May 19 to June 10.