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Buyback Bonanza

Big companies with excess cash have jumped on the buyback bandwagon and are milking it for all it's worth. Should you do the same?

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This story appears in the October 2006 issue of Entrepreneur. Subscribe »

You needn't look far for evidence that stock buybacks are all the rage. Over the past year, many companies, often under pressure from shareholders to return excess cash idling on their balance sheets, have announced large share repurchase programs. According to Standard & Poor's Corp., for the 12 months prior to March 31, 2006, S&P 500 companies bought back a record $367.4 billion in stock. In the first quarter of 2006, buyback activity rose 22.1 percent over the first quarter of 2005. "The result of that share reduction has been that earnings have increased significantly," says Howard Silverblatt, senior index analyst for S&P in New York City.

But should small caps be hopping on the buyback bandwagon? They apparently have the cash, according to stats from Prudential Equity Group, a subsidiary of Prudential Financial in Newark, New Jersey. Cash makes up about 11 percent of small-cap market capitalization, compared to about 8 percent for the S&P 500 and 7.8 percent for the S&P midcap. Among the smallest companies, "buyback activity is up only marginally over the past year or two," says Steven DeSanctis, director of small-cap research at Prudential Equity. "Valuations for the small cap are too [high] right now."

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