Companies buying their own stock make up more of the U.S. equity market than ever before, underpinning share values even as the Federal Reserve prepares to reduce stimulus.
Stock acquired under company repurchase programs represented 6.4 percent of daily trading in the Russell 3000 Index by value through Sept. 30, exceeding 2007’s level of 4.1 percent, according to data compiled by Bloomberg and Birinyi Associates Inc. The proportion of trading is higher even as chief executive officers spend $343 billion less on buybacks so far this year, reflecting a seven-year decline in equity volume.
Apple Inc. to Walt Disney Co. and International Business Machines Corp. (IBM) took advantage of record-low interest rates to raise an unprecedented amount of debt financing and repurchased stock, helping boost per-share U.S. earnings for four years. With cash at a record, buying by companies is poised to continue in a bull market that is about to enter its sixth year.
“The mathematics are pretty compelling,” Martin Leclerc, founder of Barrack Yard Advisors LLC and a 30-year veteran of investment management, said in a telephone interview Dec. 11. His firm oversees $260 million. “There will be continued shareholder buybacks, even increased shareholder buybacks, because things are pretty good.”
Gains in the 100 Standard & Poor’s 500 Index stocks (SPX) with the most purchases relative to market value have beaten the full index this year, 40 percent to 27 percent, including dividends. Since March 2009, companies focused on buybacks have risen 270 percent, compared with the S&P 500’s 190 percent. Stocks fell 1.6 percent last week after speculation an improving economy would spur the Fed to cut stimulus as early as this week.
The S&P 500 climbed 0.6 percent to 1,786.54 at 4 p.m. New York time today.
Companies have helped offset trading lost as about $400 billion was withdrawn from mutual funds that invest in American stocks from 2009 through 2012. Buybacks as a proportion of the value of stocks traded have increased each of the last four years as companies purchased $1.88 trillion of shares since 2009, according to Birinyi and Bloomberg data.
Stock trading fell every year since 2007, based on data for the Russell 3000, which is composed of companies representing 98 percent of the investable U.S. equity market, according to the Russell website. The data on buybacks compares the average daily value of repurchases each year compared with the overall value of shares changing hands.
S&P 500 earnings reached more than $100 a share last year, compared with about $60 in 2008, data compiled by Bloomberg show. They’re forecast to rise 5.3 percent to $109.40 in 2013, analyst estimates compiled by Bloomberg show.
“I don’t think we’re anywhere near the level of overall valuation where companies will not buy stock back,” Paul Zemsky, the head of asset allocation at ING Investment Management, which oversees $190 billion, said in a telephone interview Dec. 11. “Companies are still buying stock.”
The S&P 500’s price-earnings ratio has increased 17 percent this year to 16.7. While the multiple reached 17 last month, the highest level in almost four years, the average since 1998 is about 19, data compiled by Bloomberg show.
Apple (AAPL), the world’s largest company by market value, borrowed $17 billion in its first bond sale since 1996 to help fund a $55 billion addition to its capital return plan. The offering was the largest on record until Verizon Communications Inc. sold $49 billion in bonds in September. Shares of the Cupertino, California-based company have rallied 25 percent since the April 30 announcement, more than the 11 percent gain in the S&P 500.
IBM, based in Armonk, New York, bought back about $35 billion since the end of 2010, data compiled by Bloomberg show. The world’s largest provider of computing services has said it plans to repurchase $50 billion from 2011 to 2015. While revenue has fallen the last six quarters, buybacks have helped per-share earnings expand.
Disney, the world’s largest entertainment company, plans to purchase between $6 billion and $8 billion in shares this fiscal year, which ends Sept. 30, Chief Financial Officer Jay Rasulo said during a Sept. 12 conference call. The Burbank, California-based company has bought back about $3 billion in calendar 2013, Birinyi data show. Disney, which has about $4 billion in cash and short-term investments and an A credit rating, has seen shares climb 40 percent this year.
Pfizer Inc. (PFE) gained 73 percent the last three years. The New York-based company said it plans to buy back $39 billion of stock, including a June announcement for $10 billion. The world’s biggest drugmaker acquired more than $11 billion so far this year, according to Birinyi data. Pfizer sold $4 billion of bonds in May, its first dollar-denominated offering in more than four years.
The $1.137 trillion of investment-grade corporate bonds issued this year is a record, topping last year, according to data compiled by Bloomberg. While the average yield of 3.11 percent is up from the record low 2.65 percent in May, it’s still almost 1.8 percentage points below the decade mean, Bank of America Merrill Lynch index data show.
“A lot of companies are using their cash flow to buy back shares and quite a few companies are borrowing money to buy back shares,” Edward Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York said in a Dec. 11 phone interview. “That will probably continue at the pace we’re seeing now.”
The Fed has kept its benchmark lending rate near zero since December 2008 and implemented three rounds of economic stimulus programs. The central bank will reduce its $85 billion monthly bond purchases at the Dec. 17-18 meeting, according to 34 percent of economists surveyed by Bloomberg Dec. 6. Nine of the 35 economists surveyed said the central bank will buy fewer bonds at its January meeting, and the remaining 14 predict tapering will start in March.
While share buybacks have boosted earnings, they’re also a sign that the economy isn’t strong enough to support corporate investments, according to Bruce McCain, who helps oversee more than $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland.
Gross domestic product expanded 1.7 percent this year, down from 2.8 percent in 2012, according to 86 economist estimates compiled by Bloomberg. The U.S. economy increased an average of 2.3 percent per quarter since 2009, the weakest recovery since World War II. While a report last week showed retail sales rose more than forecast in November, a separate release showed unemployment benefits increased.
“At the margin we’re seeing some improvements in the economy, but there doesn’t seem to be a significant pickup,” McCain said in a Dec. 11 phone interview. “It’s a tough environment for companies to find projects where they can put more money into a new capacity, when most industries are struggling.”
To LPL Financial LLC’s Jeffery Kleintop, a slowdown in share repurchases wouldn’t be a negative sign. After a record year of corporate buying, companies will shift next year to investing their extra cash in plants, equipment and more workers as sales pick up with the economy, he said.
Revenue is forecast to grow almost twice as fast in 2014 as it did this year. Analysts project S&P 500 companies will boost sales 4.1 percent to $1,134 per share next year, then another 4.5 percent to $1,166 in 2015, according to data compiled by Bloomberg.
“We may not see as many buybacks,” Kleintop, chief market strategist at LPL in Boston, which manages about $400 billion, said in a Dec. 11 phone interview. “It’ll be positive. Businesses will actually be investing in fundamental growth and not financial engineering. Next year, the growth in earnings will be much more focused on fundamental growth, which is much more healthy.”
Chief executives have record cash that could keep buybacks going or be used to fund investments. S&P 500 companies had $1.14 trillion of cash and equivalents as of June 30 and are on track to top that for the third quarter, according to data compiled by S&P. The total has increased every quarter since Sept. 30, 2012, and is almost twice the level when the S&P 500 last reached a record in October 2007.
Companies authorized $728 billion in repurchase programs this year, compared to $467 billion at this point last year, Birinyi data show.
“Buybacks are a good thing,” Thomas Garcia, the head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc. said in a Dec. 11 phone interview. His firm oversees $90 billion. “They’re willing to purchase shares. It’s a good thing to see that they have cash flow.”
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