The supply of available stock, or float, is rising, which could crimp future market gains. Not only are cash-strapped companies scaling...
The supply of available stock, or float, is rising, which could crimp future market gains.
Not only are cash-strapped companies scaling back share-buyback plans, they’ve also stepped up issuance of new shares or securities convertible to stock so far in the second quarter, says TrimTabs Investment Research.
“That’s a bearish signal,” says Vincent Deluard, TrimTabs’ global equity strategist.
Both trends reflect difficulty raising debt capital amid a credit crunch.
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Newly announced buybacks fell 24 percent to $136 billion in the first quarter, compared with $179 billion in the year earlier. The second quarter so far also looks slow.
Meanwhile, second-quarter initial public offerings and secondary sales are on track to reach the highest level since the first quarter of 2004.
Shares outstanding rose to 440.17 billion May 28, compared with 433.58 billion a year ago, according to Russell Investments.
Buybacks lift share prices by reducing shares outstanding and increasing per-share earnings. Share issuance, by contrast, dilutes the existing pool.
Deluard notes new offerings are mostly by cash-strapped financial companies.
In the second quarter so far, the sector accounted for 72 percent of new offerings, compared with about 25 percent historically, he says.
Buybacks declined across all sectors, though more sharply among financials.
Meanwhile, fund investors have grown leery of stocks, as fund flows have eased from a year earlier. “We don’t see that much new money coming into the market,” notes Deluard.
Still, he thinks within six months, the market will have absorbed the heightened supply of stock.
David Fried, editor of Buybackletter.com, expects buyback activity to recover but remain below 2007’s heady level.