BUYBACK QUARTERLY June 18, Buybacks Grow 50% Year-over-Year; near Pre-Recession Highs

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1 BUYBACK QUARTERLY Key Metrics: + Quarterly Buybacks Grew 50% Year-over-Year: Dollar-value share repurchases amounted to $154.5 billion over the first quarter and $535.2 billion for the trailing twelve months. The first quarter sum is the third largest amount since 2005, and both the Information Technology and Industrials sectors surpassed peak buyback spending. + Buyback Leaders Shift: Apple was the only company from the top ten stocks by share repurchases in 2013 that didn t slow its pace of spending in Q1. Meanwhile, five of the top ten stocks by share repurchases in Q1 spent more money on buybacks in the first quarter than in any period in at least ten years. + Information Tech, Materials, & Industrials Increase Buybacks >100%: The Information Technology sector spent the most on quarterly repurchases ($47.4 billion) in Q1, and also showed the highest year-over-year growth in spending (+175.5%). The Materials and Industrials sectors also registered impressive growth in share repurchases (141.7% and 119.2%). + Buyback Yield Falls Due to Higher Stock Valuations: A run-up in stock valuations has made share repurchases less effective. Over the trailing twelve-month period, companies repurchased 3.3% of current shares outstanding. This metric maxed out in Q at 4.9%, and the buyback yield was consistently higher during the four quarters spanning from Q to Q Quarterly Share Repurchases ($M) and Buyback Yield (%) Michael Amenta, CFA, Research Analyst mamenta@factset.com Media Questions/Requests media_request@factset.com S&P 500 June 18, , , , , ,000 80,000 60,000 40, , '05 '06 '07 '08 '09 '10 '11 '12 '13 S&P 500 Quarterly Buybacks (Left) S&P 500 Index price Companies Repurchasing Shares (Right) U.S. Recessions Buyback Quarterly is one part of three reports ( Dividend Quarterly and Cash & Investments Quarterly ) analyzing cash and discretionary spending within the S&P 500. The other reports can be found at or within the FactSet Market News application of your FactSet workstation. All data published in this report is available on FactSet. Please contact media_request@factset.com of FACTSET for more information. FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 1

2 BUYBACK QUARTERLY June 18, 2014 Buybacks Grow 50% Year-over-Year; near Pre-Recession Highs But Boost in Share Repurchases Seems Short-Lived Aggregate share buybacks grew 50% in Q1 to $154.2 billion, and amounted to the third largest quarterly total since The biggest contributor to the Q1 total was Apple s record $18.6 billion in repurchases, but IBM also had an uncharacteristically active quarter with $8.3 billion in buybacks. In addition, five of the top ten companies by dollar-value buybacks in Q1 are traditionally not big spenders, and each spent more money on buybacks in Q1 than in any quarter in at least ten years. These companies included FedEx, Boeing, Abbott Laboratories, Corning, and ebay. Going forward, however, it seems unlikely that aggregate buyback activity will match that of Q1. Most of the five aforementioned companies indicated that forward buyback activity would not keep pace with Q1. And, in today s earnings call, FedEx announced that it repurchased about $1 billion in the second calendar quarter (as compared to $2.8 billion in Q1). In addition, both Apple and IBM seem poised to slow their repurchase activity. During the Q1 earnings call, Apple raised its share repurchase authorization from $60 billion (of which $14 billion remained) to $90 billion. This works out to $6.3 billion per quarter if Apple completes the program by its December 2015 time frame. IBM is also expected to reduce its per-quarter spending. CFO Martin Schroeter admitted that share repurchases were front-end loaded, and that full year spending on buybacks would be slightly less than 2013 ($14.0 billion). This would suggest quarterly spending will be less than $2 billion through the remainder of Finally, IBM isn t the only big spender that is expected to slow its pace of buybacks in 2014 relative to Of the top ten companies from 2013, Apple is the only stock that has picked up activity from the pace in General Electric disclosed that discretionary buybacks would be reduced, and Exxon Mobil, AT&T, Oracle, and Wal-Mart s activity in Q1 was less than the average spending throughout Though Aggregate Spending Similar, Repurchase Characteristics Diverge Sharply from 2007 The second and third quarters of 2007 were the only quarters since 2005 to show more spending on share repurchases ($161.8 billion and $177.9 billion, respectively). But the contrast between repurchase activity in 2007 and in the current period is stark. In recent periods, higher valuations are making share repurchases less impactful, different sectors are driving the activity, and companies are spending less on buybacks relative to cash inflows. Lower Buyback Yield In the peak buyback period of Q3 2007, trailing twelve-month ( TTM ) share repurchases amounted to 4.9% of shares outstanding. In Q1, despite buybacks being only 11% lower, share repurchases amounted to a yield that was 35% lower: 3.3%. This buyback yield has been held down by a surging stock market in recent periods. Rising stock valuations make share repurchases more expensive and depress the number of shares purchased for a given dollar amount. For example, the buyback yield in Q was higher at 3.6% even though repurchases amounted to 72% of the value bought back in Q ($111.7 billion). The yield was higher from Q to Q because the average trailing price-to-earnings ( P/E ) ratio of the S&P 500 was 13.3 versus 15.9 from Q to Q As a result, the recent uptick in the dollar-value of share repurchases was not enough to purchase as many shares as were bought in Q Though the Information Technology sector had the highest buyback yield in Q1 (5.1%), the overall leader in the index was in the Industrials sector: ADT Corporation. The company repurchased 25.8% of trailingtwelve month shares outstanding, and previously noted the relative attractiveness of buybacks at its valuation. However, the company s share price and trailing P/E valuation have been on the rise since February, and ADT Corporation significantly slowed spending from $1.2 billion in Q4 to $120 million in Q1. FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 2

3 BUYBACK QUARTERLY June 18, 2014 Share repurchase activity in the trailing twelve months also wasn t enough to reduce shares outstanding year-over-year (though the conversion of dilutive securities and stock acquisitions can have a significant impact on shares). Using constant constituents, shares grew 0.4% year-over-year in the S&P 500, slightly higher than the average of 0.3% since Buybacks Driven by Information Technology & Industrials, not Financials Sector-based share repurchase activity also differed significantly between Q1 and the period of peak activity. In Q3 2007, share repurchases in the Financials sector were 60% higher than the level in Q ($28.6 billion versus $17.7 billion). Intensified regulatory standards in the Financials sector have helped keep a lid on buybacks, but so has a depressed recovery. The Financials sector is still 4% smaller than its market value in mid On the other hand, activity in the Information Technology sector was far higher in Q1 that in Q (by $24 billion), and the sector has led all groups in buyback activity for eight straight quarters. In addition, the Q1 total of $47.4 billion was the highest spending by any sector since at least 2005 (the next highest was $38.0 billion by the Information Technology sector in Q4 2008). In contrast to the Financials sector, growth in spending has been supported by a healthy recovery the Information Technology sector s market value has grown nearly 60% since mid The biggest contributors to the Information Technology sector s record quarter in Q1 were Apple and IBM, which repurchased $18.6 and $8.3 billion, respectively. This compares to $5.1 and $6.0 billion for the two companies in the previous quarter. In addition, Apple s quarterly buyback amounted to the largest on record since 2005 (surpassing Apple s own record at $16.0 billion in Q2 2013), when the SEC enhanced the transparency of issuer repurchases. Apple s trailing twelve-month buyback activity of $45.4 billion also easily surpasses the record since 2005 (the second largest TTM sum was Exxon Mobil at $35.7 billion in 2008). Apple s Q1 buyback was the product of a $12 billion accelerated share repurchase ( ASR ) program in January, the completion of an ASR from April 2013, and $6.0 billion in open market repurchases. In its most recent earnings call, Apple stated that the size of the repurchase reflects their confidence in the company s future and their belief that the current stock price does not reflect the full value of the company. The record activity was hinted early in the quarter when CEO Tim Cook announced $14 billion in share repurchases after shares slid following the company s Q4 earnings report. The Industrials sector was the only other sector to also reach record spending in Q1, and was also noteworthy for having greater than 100% growth in buybacks (119.2%). The sector was most supported by five companies that each increased repurchases by more than $1 billion since the year ago quarter: FedEx, Boeing, Caterpillar, General Dynamics, and Illinois Tool Works. With the exception of Illinois Tool Works, which repurchased $365 million in Q1 2013, each of these companies spent less than $100 million in buybacks in Q The Materials sector was also noteworthy for its year-over-year growth (141.7%) and spending relative to the sector s history. The group only spent more on buybacks in Q ($6.9 billion versus $6.7 billion). The Materials sector has not traditionally been a big participant in share buybacks it s averaged $2 billion per quarter since 2005, or just 2% of the S&P 500 quarterly average but big buyback activity from LyondellBasell Industries and Dow Chemical ($1.3 billion each) in Q1 pushed the group into record territory. Neither company engaged in repurchases in Q Buybacks Utilize Less Free Cash Flow Another difference between peak pre-recession periods was in the amount of cash inflows spent. In the trailing twelve months ending Q3 2007, companies spent $602.8 billion in buybacks on negative adjusted free cash flow (-$254.9 billion). Adjusted free cash flow subtracts dividend payments and fixed capital expenditures from operating cash flow. In the trailing twelve months ending Q1 2014, TTM adjusted free cash flow grew 30.6%, which helped keep buyback spending in normal territory on a FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 3

4 BUYBACK QUARTERLY June 18, 2014 relative basis. Over the period, buybacks amounted to less than two thirds (65.9%) of adjusted free cash flows. This compares to the median, quarterly ratio of 64.3% since 2005 (excluding periods where free cash flow was negative). The ratio has ranged from 64.0% to 67.8% over the past six quarters. But the increase in buybacks has outpaced cash inflows for the highest growth sectors. The Materials sector spent 195.5% of adjusted free cash flows on share repurchases in the trailing twelve months ending Q1. This compares to a median of 82.9%. In addition, the Information Technology and Industrials sectors are also significantly above their median (83.7% versus 68.7%, and 104.6% versus 79.4%). FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 4

5 Dollar-Value Buybacks: Quarterly BUYBACK QUARTERLY June 18, 2014 All aforementioned and forthcoming values are in millions, unless otherwise designated. Quarterly data is organized by adjusted calendar quarters. Adjusted calendar quarters are mapped in three month denominations with Q1 capturing quarters ending in February, March, and April. 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Dollar Value Buybacks Most Recent Quarter Industrials Financials Health Care Energy Staples Materials Utilities Information Technology Discretionary Telecommunication Services Sector Aggregate Time Series Average S&P 500 Aggregate S&P 500 Time Series Avg Company Top 10 Companies by Dollar-Value Buybacks Most Recent Quarter Quarter's Buybacks % Change in Dividend Sector ($M) Shares (Qtr) Outflows 1 Year Total Return Apple Inc. Information Technology $18,556 (3.4%) $2, % IBM Information Technology $8,324 (4.0%) $990 (8.3%) Exxon Mobil Corporation Energy $3,860 (0.9%) $2, % FedEx Corporation Industrials $2, % $ % Boeing Company Industrials $2,585 (2.2%) $ % Abbott Laboratories Health Care $2,109 (3.0%) $ % Oracle Corporation Information Technology $2,036 (0.5%) $ % Cisco Systems, Inc. Information Technology $2,005 (1.4%) $3, % Corning Incorporated Information Technology $1,852 (6.6%) $ % ebay Inc. Information Technology $1,811 (2.1%) $0 (5.8%) S&P $154, % $90, % FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 5

6 BUYBACK QUARTERLY June 18, 2014 Dollar-Value Buybacks: Trailing Twelve Months 160, , , ,000 80,000 60,000 40,000 20,000 0 Dollar Value Buybacks Trailing Twelve-Month Basis Industrials Health Care Financials Staples Energy Materials Utilities Information Technology Discretionary Telecommunication Services Sector Aggregate Time Series Average S&P 500 Aggregate S&P 500 Time Series Avg Top 10 Companies by Dollar-Value Buybacks Trailing Twelve Months TTM % Change in Company Buybacks Shares Dividend Sector ($M) (TTM) Outflows 1 Year Total Return Apple Inc. Information Technology $45,377 (8.3%) $11, % IBM Information Technology $19,823 (8.7%) $4,100 (8.3%) Exxon Mobil Corporation Energy $14,237 (3.4%) $11, % Pfizer Inc. Health Care $13,067 (11.2%) $6, % Oracle Corporation Information Technology $10,702 (5.0%) $1, % General Electric Company Industrials $9,736 (3.0%) $8, % Cisco Systems, Inc. Information Technology $9,177 (3.7%) $3, % AT&T Inc. Telecom Services $8,367 (4.2%) $9, % Home Depot, Inc. Discretionary $7,864 (6.4%) $2, % Merck & Co., Inc. Health Care $6,862 (2.9%) $5, % S&P $534,758 (1.6%) $345, % FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 6

7 Repurchases YoY Growth BUYBACK QUARTERLY June 18, 2014 Buybacks to Adjusted Free Cash Flow: Trailing Twelve Months Adjusted free cash flow to equity is defined as cash from operating activities minus capital expenditures from fixed assets and cash dividends paid. Periods where aggregate free cash flow is negative have been removed from the charts below. Dollar-Value Buybacks to Free Cash Flow Trailing Twelve Month Basis Materials Staples Industrials Health Care Financials Energy Utilities Discretionary Information Technology Telecommunication Services Sector Aggregate Time Series Median S&P 500 Aggregate S&P 500 Time Series Median The following chart shows sector-level year-over-year growth in trailing twelve months of adjusted free cash flow (x-axis) and dollar-value buybacks (y-axis). Growth in Buybacks versus Growth in Free Cash Flow TTM Basis 80% 60% 40% 20% 0% -160% -140% -120% -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% 160% -20% -40% -60% -80% Discretionary Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities S&P 500 FCF YoY Growth Source: FactSet *Note that the Materials and Information Technology sectors are not shown because they grew TTM buybacks by 157.7% and 99.6%, respectively, versus TTM adjusted free cash flow declines of 2.6% and 1.6%. FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 7

8 Buyback Yield BUYBACK QUARTERLY June 18, 2014 Buyback yield is calculated by dividing the TTM shares repurchased by the company s current shares outstanding. It s also important to note the relationship between dividend and share yields. Share repurchases decrease the dividend burden of a company by reducing shares outstanding, and can reduce dividend yield by increasing a stock s price Buyback Yield by Sector TTM Basis Health Care Industrials Staples Energy Financials Materials Utilities Information Technology Discretionary Telecommunication Services Sector Aggregate Time Series Average S&P 500 Aggregate S&P 500 Time Series Avg Historical Buyback Yield with Buyback Activity and S&P 500 Price 180, , , , ,000 80,000 60,000 40,000 20, '05 '06 '07 '08 '09 '10 '11 '12 '13 S&P 500 Quarterly Buybacks (Left) S&P 500 Index price (Hidden) Buyback Yield (Right) U.S. Recessions FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 8

9 Trends in Common Shares Outstanding BUYBACK QUARTERLY June 18, 2014 While share repurchases are a large factor in determining the change in share count of a company, they do not capture such activities as exchange of common stock for debentures, conversion of preferred stock, convertible securities, or stock options, or the issuance of stock for acquisitions. Therefore, the charts below are included to show the aggregate change in shares outstanding. The first chart shows aggregate common shares outstanding in the S&P 500 using a rolling universe and a universe of only the companies that were in the index throughout the time series. The latter view is intended to isolate the trend in share count from constituent changes. The number of companies included in this fixed universe is 316. Aggregate Common Shares Outstanding Fixed and Rolling Universe 320, , , , , , , ,000 '05 '06 '07 '08 '09 '10 '11 '12 '13 S&P 500 Aggregate Time Series Average S&P 500 Fixed Universe Fixed Universe Average U.S. Recessions Year-over-Year Growth in Common Shares Outstanding Information Technology Telecommunication Services Discretionary Utilities Materials Industrials Financials Staples Energy Health Care Sector Aggregate Time Series Average S&P 500 Aggregate S&P 500 Time Series Avg FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 9

10 BUYBACK QUARTERLY June 18, 2014 Historical, Forward Performance: Share Repurchase Activity For this back test, S&P 500 companies were broken into quartiles by their share yield. Companies were placed into four equal-sized groups based on trailing twelve-month activity, plus a fifth group containing companies that did not repurchase shares over the period. It s important to note that the companies repurchasing shares actually outperformed both the S&P 500 and those companies that did not make repurchases on an equal-weighted basis. Historical, Forward Returns by Share Yield Relative to S&P 500 TR Index '05 '06 '07 '08 '09 '10 '11 '12 '13 Quartile 1 Quartile 2 Quartile 3 Quartile 4 No buybacks U.S. Recessions via FactSet Alpha Testing For this back test, S&P 500 companies were broken into groups by their buyback spending relative to operating cash flow on a trailing twelve month bases. Companies that had negative operating cash flow or that did not repurchase shares over the trailing twelve months were excluded. Historical, Forward Returns by Buybacks to Operating Cash Flow Ratio Relative to S&P 500 TR Index '05 '06 '07 '08 '09 '10 '11 '12 '13 Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 U.S. Recessions via FactSet Alpha Testing FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 10

11 Important Notice BUYBACK QUARTERLY June 18, 2014 The information contained in this report is provided as is and all representations, warranties, terms and conditions, oral or written, express or implied (by common law, statute or otherwise), in relation to the information are hereby excluded and disclaimed to the fullest extent permitted by law. In particular, FactSet and its affiliates disclaim implied warranties of merchantability and fitness for a particular purpose and make no warranty of accuracy, completeness or reliability of the information. This report is for information purposes and does not constitute a solicitation or an offer to buy or sell any securities mentioned within it. The information in this report is not investment advice. FactSet and its affiliates assume no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this report. About FactSet FactSet (NYSE:FDS) (Nasdaq:FDS) combines integrated financial information, analytical applications, and client service to enhance the workflow and productivity of the global investment community. The company, headquartered in Norwalk, Connecticut, was formed in 1978 and now conducts operations along with its affiliates from twenty-four locations worldwide, including Boston, New York, Chicago, San Mateo, London, Amsterdam, Frankfurt, Paris, Milan, Tokyo, Hong Kong, Mumbai, Dubai, and Sydney. About FactSet Fundamentals FactSet Fundamentals gives you access to current, comprehensive, and comparative information on securities worldwide. The comprehensive coverage available includes more than 69,000 companies from over 70 countries, with 20 years of historical data, and up to 2,000 data items on each company record. Comprised of annual and interim/quarterly data, detailed historical financial statement content, per share data, calculated ratios, pricing, and textual information, FactSet Fundamentals provides you with the information you need for a global investment perspective. About FactSet Alpha Testing Alpha Testing is FactSet s backtesting tool. Alpha Testing lets you test ideas about which quantitative and qualitative factors drive returns. Use our robust and flexible interface to create custom models and communicate results. Alpha Testing is fully integrated into the FactSet workstation. Model scores can be used in real time portfolio contribution or for portfolio construction. FactSet.com Copyright 2014 FactSet Research Systems Inc. All rights reserved. 11