WALL STREET JOURNAL.
Stock Buybacks Are Booming, but Share Prices Aren’t Budging
analysts worry companies are buying their shares at excessive
valuations, while others say cash could have gone toward capital
Bank of America is one of
several major companies buying back stock this year. PHOTO:
RICHARD B. LEVINE/ZUMA PRESS
July 8, 2018 9:00 a.m. ET
U.S. companies are buying
back record amounts of stock this year, but their shares
aren’t getting the boost they bargained for.
S&P 500 companies are on track to
repurchase as much as $800 billion in stock this year, a record that would
eclipse 2007’s buyback bonanza. Among the biggest buyers are companies like Oracle Corp. , Bank
of America Corp. and
JPMorgan Chase & Co.
But 57% of the more than 350
companies in the S&P 500 that bought back shares so far this year are trailing
the index’s 3.2% increase. That is the highest percentage of companies to fall
short of the benchmark’s gain since the onset of the financial crisis in 2008,
according to a Wall Street Journal analysis of share buyback and performance
data from FactSet.
And the historic spending spree on
share buybacks has some analysts worried companies are buying their shares at
excessive valuations during the peak of the economic cycle and at a time when
the market rally is nine years old. Others warn the billions of dollars spent to
buy back shares could have gone toward capital improvements like new factories
or technology that could lead to stronger long-term growth.
“There has been less of a reward for
companies engaging in new buybacks over the last 18 months,” said Kate Moore,
chief equity strategist and a managing director at asset-management firm BlackRock Inc. “It’s
fair for investors to ask whether companies are buying at the right point.”
The S&P 500 Buyback index, which
tracks the share performance of the 100 biggest stock repurchasers, has gained
just 1.3% this year, well underperforming the S&P 500.
Share buybacks have become corporate
America’s go-to strategy for boosting stock prices and earnings over the past 30
years. The point of buybacks is to try to make a company’s stock more valuable.
By mopping up shares, a company shrinks the stock pie, which boosts earnings per
share. That, in turn, should push the share price higher.
The potential problem: Executives
directing buybacks are essentially timing the market, and often they end up
Buyback activity reached a frenzy in
the early 2000s; the previous record for share repurchases was $589.1 billion in
2007. But that was just a year before the stock market tumbled into the worst
financial crisis since the Great Depression. The result: companies like Exxon
Mobil Corp., Microsoft Corp.
Business Machine Corp.
each paid more than $18 billion to repurchase stock at a peak, only to see their
share prices slump a year later.
Stock buybacks appear just as
ill-timed now, some analysts and investors say, especially as companies ramp up
spending after last year’s $1.5 trillion tax overhaul put extra cash in their
Oracle has been one of the biggest
buyers of its own stock in recent years and spent
$11.8 billion on stock repurchases last year, when shares gained
nearly 23%. But that gamble hasn’t looked smart this year as the
networking-device maker has struggled alongside the broader market, pulling its
shares down 6%.
Still, Oracle’s board approved a
fresh round of share buybacks totaling $12 billion in February, and executives
appear to have spent nearly half that sum already. A representative from Oracle
declined to comment on its share buyback program, but the company said in a
recent Securities and Exchange Commission filing that it “cannot guarantee” its
share repurchase “will enhance long-term stockholder value.”
Others like McDonald’s Corp. ,
Bank of America and JPMorgan Chase have spent
billions on share repurchases this year, but haven’t seen a
short-term bounce in share prices. McDonald’s bought back $1.6 billion of shares
in the first quarter, but the fast-food chain’s stock is down 7.4% this year.
Bank of America and JPMorgan
Chase have both spent more than $4.5 billion to buy back their
shares, which are down 5% and 2.7%, respectively.
All three companies also spent
multibillion-dollar sums on buybacks in 2017 as the stock market hit repeated
Companies in the S&P 500 that have
repurchased shares are expected to see a return on investment of about 6.4% this
year, a percentage that falls below the past six rolling five-year periods as
measured by Fortuna Advisors, a financial consulting firm that has examined
buyback trends going back to 2007.
Returns on investment for buybacks
peaked in 2013, according to Fortuna’s analysis, as companies used share
repurchases to boost earnings and dig themselves out of the depths of the
financial crisis. With stock prices relatively low at the time and economic
activity tepid, share buybacks were one of companies’ key sources of earnings
But even as the stock market
steadied in the subsequent years and economic growth around the world picked up
to help boost profits, corporate executives continued to spend wildly on share
repurchases—often at the expense of other types of spending, including dividends
and capital improvements. Spending on capital expenditures rose to $166 billion
in the first quarter, up 24% from a year earlier, according to Credit
Suisse , but
still well below the $189 billion spent on buybacks.
“The majority of capital deployed is
going right back to shareholders and not reinvestment in businesses,” said
Gregory Milano, chief executive at Fortuna. “If that’s the only thing you’re
relying on, it’s going to end badly.”
Some share buybacks do pay off, but
that tends to be among companies that show a high level of sales and earnings
growth on their own, analysts say. Apple Inc.,
for example, has bought
back $22.8 billion worth of stock so far this year. Its shares have
risen 11%, with much of the boost coming after it reported strong gains in
second-fiscal-quarter revenue and profit—as well as a record $100 billion plan
to buy back more stock.
“Corporate America has such an
obsession with bottom-line growth,” said Jay Bowen, president of Bowen Hanes &
Co., manager of the $2 billion Tampa Firefighters and Police Officers Pension
Fund. “Long term, I don’t like it.”
Write to Michael
Wursthorn at Michael.Wursthorn@wsj.com
Appeared in the July 9, 2018, print edition as
'Stock Prices Defy Surge in Buybacks.'