Companies' Stock Buybacks Help Buoy the Market
Share Repurchases Are at Fastest Clip Since Financial Crisis By
Sept. 15, 2014 7:24 p.m. ET
Companies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008. The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter. The surge underscores share-price gains by many companies repurchasing stock more than five years after shares hit their low in the late stages of the financial crisis. Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays PLC. "There are a couple of reasons why companies do buybacks," said Jonathan Glionna, head of U.S. equity strategy at Barclays. "One is that it seems to work; it makes stocks go up."
Some investors applaud repurchases as an appropriate way to return cash to shareholders by buying their stock or putting excess funds to work, akin to dividends but without the tax bite for shareholders. Other reasons to repurchase shares include to increase per-share earnings, a figure scrutinized by investors, and to offset the effect of employee compensation plans when workers sell shares back into the market. According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009. At the end of the second quarter, nonfinancial companies in the S&P 500 index held $1.35 trillion of cash, down from a record of $1.41 trillion at the end of last year, according to FactSet. But while the market often seems to reward buybacks, the practice has its critics. Some analysts and traders say stock repurchases can be used to artificially goose per-share earnings and can signal that management isn't reinvesting as much as it could in the business, potentially shortchanging long-term growth. Moreover, by lowering the number of shares outstanding, a company can cause earnings per share to rise at a faster clip than actual profits. "It's a great tool, but you've really got to figure out if it's the best use of money," said David Winters, managing member of Wintergreen Advisers, which manages $2.2 billion. Some analysts and investors take issue with leveraged repurchases, or companies using cash they raised by selling bonds. Skeptics say firms using this strategy are taking on risks that could imperil them should the economy sour or the market hit a downturn. In the second quarter, U.S. stock-market volume averaged 6.03 billion shares a day, the lowest level for the period in seven years, according to Credit Suisse Group AG. Amid the trading slowdown, the S&P 500 is up 7.3% this year. While there is no way to precisely measure the impact stock repurchases have on the market, some traders and investors say the buying at least provides support for stock prices. "It does act as a floor," said Gary Black, co-chief investment officer at Calamos Asset Management Inc., which manages $25.8 billion. Investment bankers who help execute repurchases said many companies have become more strategic with the timing of the purchases. They prefer stepping in to buy when share prices fall, and as a result, limiting share-price declines. "Is it driving the market? No, but it's an accelerant. It's giving juice to...
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