Record buybacks: Sign of bubble trouble or just cheap rates

Published Fri, Aug 12 20164:44 PM EDTUpdated Fri, Aug 12 20165:50 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Companies are buying back their own stocks at a record pace, but those buybacks aren't juicing share prices the way they once did, according to UBS. With buyback stocks not necessarily outperforming, UBS screened a list of names and identified those it believes could get high value for their purchases and those that won't. It also discussed whether the high level of buybacks suggests a bubble building and top for the stock market. "The whole point is that it has been before," said UBS equity and derivatives strategist Julian Emanuel. "What I would say is if you think about it in terms of where valuations are, it may not be a sign of a top imminently. But if buybacks continue to push on valuation as they have been, we would get more concerned that a top was in the offing." Emanuel was referring to the fact that companies can see a benefit to their earnings per share if they buy back stock and then based their income per share on a smaller float. "The P/E has moved up from mid 16s to 18.4," he said. The companies that screened best for getting most value for their buybacks were in the consumer discretionary and tech sectors, Emanuel said. Companies bought back $164 billion worth of stock in the first quarter, bringing the total to $419 billion since the first quarter of last year. UBS expects the pace for 2016 to exceed the more than $600 billion in 2007. "Management tends to repurchase shares in bull markets when profits are high and balance sheets are flush with cash, while cutting back during recessions (precisely the time they should be buying over the long term,)" the analysts wrote. The most active sectors are tech and consumer in number of shares purchased and as a percent of market cap. So far this year, 120 S & P 500 companies have announced new or increased buybacks totaling $320 billion. UBS said as for buyback announcements this year, the list is topped by Apple, which has announced it would buy back stock worth $35 billion, or 6 percent of its market cap. Wells Fargo has announced the second most with $16.9 billion in purchases planned, or 6.9 percent of its market cap. Third is McDonald's , buying $15 billion, or about 15 percent of its market cap, according to UBS. UBS said buybacks can be used to signal confidence in a company's outlook, or as a way to return capital to shareholders. The analysts said the current environment of low interest rates encourages debt issuance and can fund larger and larger buybacks. "If rates were to rise, we have argued that the corresponding increase in the cost of capital would likely dis-incentivize buybacks and instead, force management teams to explore long-term value-accretive uses of capital such as capex," they wrote. Apple , eBay , Oracle , United Continental , Ralph Lauren , Time Warner, Merck , Pepsico , Tesoro , XL Group , General Dynamics , Alaska Air , Gilead Sciences and Ameriprise Financial were on a list of stocks that UBS describes as quality buybacks at a reasonable price. It rates all of these names as a buy.

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Companies are buying back their own stocks at a record pace, but those buybacks aren't juicing share prices the way they once did, according to UBS.

With buyback stocks not necessarily outperforming, UBS screened a list of names and identified those it believes could get high value for their purchases and those that won't.

It also discussed whether the high level of buybacks suggests a bubble building and top for the stock market.