Buyback Binge Surges to New High

U.S. companies returned a record amount of cash to shareholders through stock buybacks and dividend payouts in the first quarter, continuing a trend that has helped drive the stock market’s record-setting rally.

Stock buybacks and cash dividends reached $241.2 billion during the first three months of the year, exceeding the previous record of $233.2 billion set in the fourth quarter of 2007, according to S&P Dow Jones Indices. The new high is more than three times the $71.8 billion total in the second quarter of 2009, when the economy was in the early stages of recovering from the financial crisis.

The large payouts have played a prominent role in the market’s record-breaking rally. After gaining 30% last year, the S&P 500 is up more than 5% so far in 2014 and has has set 19 new highs this year.

“I expect this trend of greater shareholder return to continue throughout 2014, as activists remain strong, interest rates low, and companies awash in cash,”  said Howard Silverblatt, senior earnings analyst at S&P Dow Jones Indices.

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Companies particularly splurged on buybacks during the first quarter. They bought back $159.3 billion worth of stock during the first three months of 2014, up 59% from a year ago and a 23% increase from the fourth quarter.

Apple Inc.(AAPL), International Business Machines Corp.(IBM) and Exxon Mobil Corp.(XOM) spent the most on buybacks in the period. Apple repurchased $18 billion worth of stock, while IBM bought back $8.2 billion of its stock and Exxon repurchased $3.9 billion of stock. Five of the top 10 companies that implemented the biggest buybacks hailed from the tech sector, including Cisco Systems Inc.(CSCO), Oracle Corp.(ORCL) and Corning Inc.(GLW)

Buybacks increase a company’s earnings per share by reducing the supply of stock, making each share more valuable. For instance in 1993 IBM had 2.3 billion shares outstanding. Today, it has about 1 billion. The stock is up more than 900% in that time frame.

“Keeping up with the current bull market means that companies have to pay more for the same number of shares, and activists are demanding more of a return, both via dividends and buybacks," Mr. Silverblatt said. “For buybacks the true test is share count reduction, and we are seeing more companies achieve share count reduction as they increase their [earnings per share].”

Many investors have warmed to strategies that invest in companies boosting their payouts. The S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has rallied 24% over the past 12 months, compared to the broad S&P 500′s 18% gain over that same time frame.

But the rally has slowed in recent months. Since Jan. 1, the Buyback Index is up 4.7%, underperforming the S&P 500′s 5.1% gain.

Critics say companies would be better off deploying their capital in other ways, such as boosting hiring, investing in research and development or making deals. 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.

“The key question for the second quarter is did they do it to boost a poor first-quarter earnings period that was impacted by weather conditions,” Mr. Silverblatt says, “or was it a shift towards more enhanced earnings via share count reduction, similar to what we experienced in 2006 and 2007?”