S&P 500 Companies Spend 95% of Profits on Buybacks, Payouts
By Lu Wang and Callie Bost | Oct 6,
2014 10:04 AM ET
Companies in the
Standard & Poor’s 500 Index
really love their shareholders. Maybe too much.
They’re poised to spend $914 billion on share buybacks and dividends
this year, or about 95 percent of earnings, data compiled by Bloomberg
and S&P Dow Jones Indices show. Money returned to stock owners
exceeded profits in the first quarter and may again in the third. The
proportion of cash flow used for repurchases has almost doubled over
the last decade while it’s slipped for capital investments, according
Jonathan Glionna, head
of U.S. equity strategy research at Barclays Plc.
Buybacks have helped fuel one of the strongest rallies of the past 50
years as stocks with the most repurchases gained more than 300 percent
since March 2009. Now, with
investors say executives risk snuffing out the bull market unless they
start plowing money into their businesses.
“You can only go so far with financial engineering before you actually
have to have a business with real growth,”
Chris Bouffard, chief
investment officer who oversees $9 billion at Mutual Fund Store in
Overland Park, Kansas, said by phone on Oct. 2. “Companies have done
about all that they can in terms of maximizing the ability to do those
S&P 500 constituents will probably say earnings rose 4.9 percent in
the third quarter when they begin reporting results this week,
according to more than 10,000 analyst estimates compiled by Bloomberg.
Alcoa Inc., Yum! Brands Inc. and Monsanto Co. are among nine companies
scheduled to announce financial details.
U.S. equities rebounded from last week’s retreat, with the S&P 500
rising 0.4 percent at 9:55 a.m. in New York. The
S&P 500 Buyback Index
is up 7.5 percent this year through Oct. 3, compared with the 6.5
percent advance in the S&P 500, after beating it by an average of 9.5
percentage points every year since 2009.
While the ratio to earnings shows how buybacks and dividends compare
to past economic expansions, it doesn’t indicate companies are
struggling to fund them. Five years of profit growth have left S&P 500
constituents with $3.59 trillion in cash and marketable securities and
they’ve raised almost $1.28 trillion in 2014 through bond sales,
headed for a record.
“Buybacks are something corporations can take control of and at low
borrowing costs, they’re a viable option,”Randy
Bateman, chief investment officer of Huntington Asset
Advisors, which manages about $2.8 billion, said by phone on Oct. 1.
At the same time, he said, “If management can’t unearth future
opportunities for growth, as a shareholder, I lose confidence.”
S&P 500 companies will spend $565 billion on repurchases this year and
raise dividends by 12 percent to $349 billion, based on estimates by
Howard Silverblatt, an
index analyst at S&P. Profits would reach $964 billion should the 8
percent growth forecast by analysts tracked by Bloomberg come true.
Profits climbed to about $230 billion over the last three months,
based on analyst forecasts. That compares with total buybacks and
dividends of about $235 billion, assuming repurchases estimated by
Silverblatt are evenly divided between the third and fourth quarters.
Cash returned to shareholders exceeded
profits in the first
quarter for the first time since 2009, data compiled by Bloomberg and
“We’re at a point you sort of question whether they can continue to
rise from here,” Glionna said in a phone interview on Oct. 1 from New
York. “This kind of 100 percent earnings is a barrier. It can bounce
around here and there, but it doesn’t go much above that.”
Excluding the recession years 2001 and 2008, dividends and stock
buybacks have represented, on average, 85 percent of corporate
earnings since 1998. The last time payouts exceeded income in 2007,
the buyback index fell 4.7 percent, compared with a 3.5 percent gain
in the S&P 500. Equities peaked that October before losing more than
half their value.
CEOs have increased the proportion of cash flow allocated to stock
buybacks to more than 30 percent, almost double where it was in 2002,
data from Barclays show. During the same period, the portion used for
capital spending has fallen to about 40 percent from more than 50
The reluctance to raise capital investment has left companies with the
oldest plants and equipment in almost 60 years. The average age of
fixed assets reached 22 years in 2013, the highest level since 1956,
according to annual data compiled by the Commerce Department.
Stock repurchases worth almost $2 trillion have helped buoy the bull
market since March 2009. The S&P 500 has gone without a 10 percent
decline for three years and is up 191 percent amid a 5 1/2-year bull
run. Even as
sales were stuck at an
average growth rate of 2.6 percent a quarter in the past two years,
per-share earnings expanded more than twice as fast, 6.1 percent, data
compiled by Bloomberg show.
During the first half of 2014, more than one-fifth of S&P 500
companies cut their share count by at least 4 percent in the first
half, Silverblatt estimated.
“Buybacks have become sort of the low-risk medicine in the C suite,”
David Lafferty, the
chief market strategist for Natixis Global Asset Management in Boston,
said by phone on Oct. 2. His firm manages about $930 billion. “The
reality is capital expenditure comes with risk, significant amount of
risk, especially in a slow-growth world. Buybacks offer a lot of
FedEx Corp. added 15 cents, or 7 percent, to its EPS in the latest
quarter through buybacks. The Memphis, Tennessee-based shipping
company authorized a repurchase program of as many as 15 million
shares last month while keeping its capital spending for the fiscal
year at $4.2 billion.
Juniper Networks Inc., bowing to pressure by activist hedge funds
Elliott Management Corp. and Jana Partners LLC, announced plans in
February to return at least $3 billion to shareholders. In August, the
Sunnyvale, California-based maker of networking equipment said it will
complete $2 billion of buybacks by the end of this year, achieving the
target earlier than expected.
The company had “an unusually high” cash flow of $425 million during
the second quarter, Chief Financial Officer Robyn Denholm said in a
conference call on Aug. 12. “We obviously have accelerated our buyback
not just because of the cash results, but also because of the
opportunistic nature of the capital returns that we’re doing at the
Juniper Networks offered buybacks equivalent to 10.9 percent of its
stock price over the 12 months through June, more than double its
earnings yield of 3.96 percent, data compiled by Bloomberg and S&P
“It’s going to be harder and harder to justify using that capital to
buy back stocks at record highs,”
Tim Courtney, who helps
oversee about $1.3 billion as chief investment officer of Exencial
Wealth Advisors, said in a phone interview from Oklahoma City on Oct.
1. “Money has to be diverted to other places to keep operations going.
The point of concern is where the future growth is going to come
To contact the reporters on this story: Lu Wang in New York at
Callie Bost in New York at
To contact the editors responsible for this story: Lynn Thomasson at
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