Companies Shrinking Their Share Numbers

For the first time since the bull market began in the U.S., stocks are in short supply as companies slash share sales to the lowest level since 2006, and buy back equity at the greatest rate in the last four years. Amgen Inc. (NASDAQ:AMGN) and Hewlett-Packard Co. (NYSE:HPQ) along with 1,971 other U.S. companies repurchased $397 billion of stock last year and issued $169 billion of new equity, thus reducing the Standard & Poor’s 500 Index (NYSEARCA:SPY) divisor by 0.6 percent last quarter, the first decline since March 2009.

“Companies want to shrink the number of shares,” James Swanson, chief investment strategist at MFS Investment Management, said. “Its efficient balance-sheet management with bond
yields where they are and share prices where they are.”

Facebook Inc. is exploring a $10 billion share sale while Bank of America (NYSE:BAC) and Deutsche Bank AG (NYSE:DB) predict U.S. IPOs this year will stay near 2011 levels. Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA), the world’s largest generic-drug maker, dropped 1.4 percent in U.S. trading on December 21, even after revealing plans to buy back as much as $3 billion worth of shares. Amgen (NASDAQ:AMGN), the world’s largest biotechnology company repurchased 9.5 percent of its shares last month for about $5 billion. Hewlett-Packard, the world’s largest manufacturer of personal computers, spent $10.1 billion to buy back shares last year.

Buybacks aren’t a signal that stocks are undervalued, said Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA in London. S&P 500 companies spent an
additional 35 percent of their net cash flow on repurchases at the end of 2007. “I hate share buybacks,” Lapthorne said at a presentation to investors and journalists, “with a passion.”