In news that was overshadowed by the bailout debate, GE announced today that it was suspending its stock buyback program. While the suspension was precipitated by declining earnings and worries about GE Capital, there are some general comments that I want to make about the action that relate to stock buybacks in general
1. Flexibility: One of the biggest reasons for the shift among US companies from dividends to buybacks was that firms can respond much more quickly to adverse circumstances with the latter. GE's announcement on buybacks was greeted with sanguinity by markets today. If GE had cut dividends, the market reaction would have been much more negative than it was this announcement.
2. Announcement versus Action: Investor should take stock buyback programs announced by companies with a pinch of salt. Many company announce buyback programs with fanfare but do not carry through all the way.
3. Valuation: Last year, companies in the S&P 500 returned twice as much cash to stockholders in the form of stock buybacks than dividends, resulting in a total yield of 5.34% on the index (about 1.9% from dividends and the rest from buybacks). One measure of whether the equity market will be able to sustain the body blows it is receiving now will be in how well the buyback number holds up for the next year or so. A bunch of companies, including Microsoft ($40 billion), have announced buyback programs.