Buyback boom keeping the stock market afloat

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

Companies are still choosing to focus on boosting share price rather than making longer-term investments.

During the first quarter, at a time when the U.S. economy contracted 0.2 percent, S&P 500 companies were spending freely to reduce share count through stock buybacks. Repurchases totaled $144.2 billion, an 8.7 percent rise from the previous quarter, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Companies were not spending on equipment, facilities or hiring. Capital expenditures, in fact, decreased 2 percent during the quarter after an encouraging gain of 4.7 percent in the previous quarter, recently released data from the Bureau of Economic Analysis show.

"The continued takeaway is that over 20 percent of the companies are buying their earnings-per-share growth via buybacks," Silverblatt said in a statement. "Reduced share count comes at a time when earnings growth is becoming the key quest for most companies. Share count reduction now appears to be their favorite tool for enhancing earnings."

The effectiveness of the buybacks, though, may be waning.

Whereas buybacks and dividends were seen as key drivers for the stock market's explosive gains since the bear market ended in March 2009, growth has been plodding in 2015.

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The S&P 500 is up just 2.5 percent year to date and was flat for the first quarter.

Earnings have been nothing spectacular, either. Profits grew 3.2 percent in the first quarter from the same period a year ago but are expected to fall 4.4 percent in the second quarter. Full-year expectations are for a 0.27 percent gain, according to S&P Capital IQ.

That's despite Silverblatt's estimates that the current pace of share count reduction builds in a 4 percent "tail wind" for earnings.

In dollar terms, cash returned to shareholders through buybacks and dividends was $237.7 billion for the quarter, a 5.4 percent gain over the previous three months but off the record pace of $241.2 billion for the same period in 2014. For the 12-month period, the figure hit nearly $1 trillion—$900.2 billion.

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Outside of share buybacks and dividends, corporate cash also has been put to work heavily in mergers and acquisitions, which have hit their highest level since the pre-financial crisis boom in 2007. M&A volume in the Americas is at $975.5 billion, up 27 percent from 2014, according to Dealogic.

"The shareholder return trend is now entrenched in the market," Silverblatt said. "Many investors now expect continued buybacks, as buybacks have now become part of the market support system."