Companies are gearing up for a plethora of share buybacks this year, but investors may want to look past the short-term boost for a potential sell signal.
"We expect companies will repurchase shares at a robust pace in 2015, and investors will reward these moves," analysts at Goldman Sachs, led by chief U.S. equity strategist, David Kostin, said in a note last week. But it added, "U.S. corporations should consider using their cash for other purposes."
S&P 500 stocks are trading at their highest price-to-earnings multiple in 40 years, excluding the tech bubble, Goldman noted.
"In 2007, S&P 500 firms allocated more than one-third of their cash use ($637 billion) to buybacks just before S&P 500 plunged by 56 percent. Conversely, at the bottom of the market in 2009 firms devoted just 13 percent of their annual cash spending to repurchases ($146 billion)," it said. "Like investors, many firms are poor market timers."
So far this year, S&P 500 companies have announced $265 billion worth of buyback plans, up 59 percent from the year-earlier period, Goldman said, adding it estimates buyback authorizations of $900 billion this year, up 4 percent from the 2007 peak.
Others are also concerned about the impact of cash heading to buybacks.