Buybacks. Another Nail In The Stock Market Coffin?

Just as human beings, Corporations are irrational when it comes to buying their own shares. Just as individual investors, they tend to accelerate buybacks at the top of the economic/market cycle and slow it down at the bottom. Case and point, corporate buybacks were at $160 Billion at 2007 top and only $20 Billion at 2009 bottom.

Today, in another sign that there won’t be a Cap-Ex boom, corporations are accelerating their buybacks and dividends to the pace unseen since the 2007 top. While most investors will see this as a positive, for me, it is yet another indicator that the market top is in. Or nearly in. When corporations don’t know what to do with their FED induced “funny money” the top is not that far behind. 

It has been our view since about December 31st, 2013 that the market top is in. Our mathematical and timing work continues to confirm that stand. If you would be interested in learning when the next bear market leg will start (to the day) and its internal composition, please Click Here. 

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Buybacks. Another Nail In The Stock Market Coffin?  Google

 

 

WSJ Reports: The Great Buyback Binge of 2013 Will Continue: S&P

U.S. companies bought back stock and paid dividends at a blistering pace last year, a trend that helped propel the stock market’s record-breaking rally. The heavy buying is expected to continue in 2014.

Stock buybacks among S&P 500 companies jumped to $475.6 billion in 2013, up 19% from a year earlier and the highest annual amount since 2007, when companies spent $589.1 billion on buybacks, according to S&P Dow Jones Indices.

In the fourth quarter, buybacks totaled $129.4 billion, up 1% from a quarter earlier.

Combined stock buybacks and cash dividends totaled $214.4 billion in the three months ended Dec. 31, the highest level since a record $233.2 billion were paid out in the fourth quarter of 2007. By comparison, the latest figure is almost three times the $71.8 billion total in the second quarter of 2009, when the economy was in the early stages of rebounding from the financial crisis.

In returning money to shareholders, companies are tapping into cash piles they have reached record levels in the past few years as companies cut costs and took advantage of low interest rates to borrow funds.

Some 401 companies within the S&P 500 reported buybacks last year, according to Howard Silverblatt, senior earnings analyst at S&P Dow Jones Indices, with 339 of them also paying a dividend. He said 196 of those companies spent more cash on dividends than buybacks.

“I expect this trend of greater shareholder return to continue throughout 2014,” Mr. Silverblatt said.

At least at the onset of 2014, however, the pace of buyback authorizations has slowed. U.S. companies authorized $80 billion in stock buybacks last month, a 32% drop from last year’s record-setting amount but also the third-strongest February on record, according to preliminary data compiled recently by Birinyi Associates Inc.

IBMIBM -0.93%, AppleAAPL +0.28% and PfizerPFE +1.54% paid out the biggest buybacks in the fourth quarter of last year. All purchased more than $4 billion of stock in the final three months of 2013. Five of the top 10 companies that implemented the biggest buybacks hailed from the tech sector. In addition to IBM and Apple, the other tech companies included Cisco SystemsCSCO +1.01%, OracleORCL +2.21% andMicrosoftMSFT -1.02%.

The large payouts played a direct role in boosting investor confidence in a stock-market rally that pushed the S&P 500 up 30% last year. The stock index is slightly higher in 2014.

“Although there are headlines of record setting buybacks programs, the 19.2% increase in buyback expenditures for 2013 only matched the 19.2% average daily stock price increase,” Mr. Silverblatt said. “The average stock price for Q1 2014 is running 21.0% higher than Q1 2013, meaning that a 21% increase in current expenditures is necessary to purchase the same number of shares as last year.”

Buybacks can boost earnings-per-share — a closely watched measure of profitability — by reducing shares outstanding, although some companies use the stock they buy to deliver shares to executives who exercise stock options.

But skeptics deride buybacks. They say the cash could be deployed in a more efficient manner, such as investing in research and development, boosting hiring or buying an existing company. BlackRock Inc. Chief Executive Laurence Fink has been warning lately that buybacks can create quick returns at the expense of long-term investment.

Companies also have a history of buying back shares at the wrong time. At the end of 2007, buyback activity was near record levels just as stocks were in the early stages of a precipitous drop.

Still, investors have rewarded companies that execute buybacks. Firms that heavily repurchase their own shares have seen their stock prices outperform the overall market over both short and long time frames.  The S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has outperformed the broad S&P 500 over the past 12 months.

On a total-return basis, the Buyback Index is up 31% over the past year, while the S&P 500 is up 23%. The buyback ratio accounts for the amount of cash paid for common shares over the past four quarters, divided by the market capitalization of the common stock.

But worries have surfaced recently that buybacks may be losing their luster with investors, especially as the market has rallied to new highs. Since Jan. 1, the S&P 500 Buyback Index is up 1.3% on a total-return basis, compared to the S&P 500′s 1.4% gain.