JPM JP Morgan Chase and Co

By Ben Eisen and Akane Otani 

U.S. companies are buying back their shares at a record pace, providing fresh support during a rocky stretch for the stock market when many investors have rushed for the exits.

S&P 500 companies that have reported earnings for the first three months of 2018 have bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. About 85% of S&P 500 components have reported so far.

That is on pace for the biggest amount in any quarter, based on data going back to 1998. It has been fueled in part by a new tax law that is freeing up cash and encouraging companies to bring back money held abroad.

Cash-rich companies are also increasing dividends swiftly. S&P 500 firms are on pace to have returned almost $1 trillion to shareholders for the 12 months through March though dividends and buybacks.

"The reason these companies are buying their stock is that they're smart enough to know that it's better for them than anything else," said Charlie Munger, vice chairman of Berkshire Hathaway Inc., at the company's annual meeting last weekend.

Early signs suggest share repurchases have been effective, even in a year in which stocks have been tested by uncertainty around global trade, the path of interest rates and regulation around the technology industry. Of the 20 S&P 500 companies that spent the most on buybacks over the first quarter, nearly three-quarters have outperformed the index so far this year. The group has risen an average of 5.2% in 2018, compared with the S&P 500's 1.9% gain, according to a Wall Street Journal analysis of S&P Dow Jones Indices data.

Apple Inc., the largest U.S. company by market value, said last week that it would embark on a $100 billion buyback program. The stock surged 4.4% the following day and 13% for the full week -- marking its biggest one-week percentage gain since October 2011.

Microsoft Corp.'s stock has risen 14% so far this year, after the company bought back $3.8 billion in shares during the first quarter. Boeing Co., JPMorgan Chase & Co. and UnitedHealth Group Inc. are up this year after big first-quarter buybacks.

Share repurchases can play a key role in supporting stock prices because they lower companies' shares outstanding counts -- driving up per-share earnings even without overall profit growth. Many see them as a reward for shareholders, particularly when other corporate options for spending cash, such as acquisitions, don't look attractive.

Executives say buybacks show management is bullish on the company's prospects and believe its shares are a good value.

Rising buybacks this year have been a crucial counterbalance to the rising tide of stock-fund redemptions. Investors yanked $29.4 billion out of exchange-traded funds and mutual funds tracking U.S. stocks in the first quarter, the most for any three-month stretch since 2016, according to a Bank of America Merrill Lynch report citing EPFR Global data.

The S&P 500 is up only modestly for the year. Yet many analysts believe major indexes would have suffered losses without the support of buybacks.

Corporations have long been among the biggest buyers of stocks -- making their share repurchases a major contributor to the nine-year bull market. Companies seized the chance to scoop up discounted shares following the financial crisis, with buybacks topping out in 2015 at $572 billion before leveling off.

Now with new tax incentives, share repurchases are ramping up again. The tax code overhaul President Donald Trump signed into law late last year assessed a one-time tax on foreign earnings, meant to encourage companies to repatriate more than $2 trillion in cash held overseas.

While that cash can be used for any number of activities, early signs suggest that much of it is going into shareholder returns. Goldman Sachs Group Inc. expects S&P 500 companies' spending on buybacks and dividends to increase by 22% to $1.2 trillion in 2018, outpacing the expected increase in capital expenditures and research and development in 2018, which it sees jumping 11% to $1 trillion.

"Activity is very widespread and we're seeing it executed in a lot of ways," said Jake Mendelsohn, a managing director at Bank of America Merrill Lynch who leads the desk that does corporate buybacks.

Share repurchasing has its critics. Mr. Munger noted that buying shares just to keep the stock up is "insane and immoral." Some detractors say spending on buybacks can come at the expense of spending on R&D or equipment upgrades -- things they believe are the ultimate drivers of growth over the long run.

"For so long, productivity growth has been anemic or worse, and the plan has just been to pay your shareholders," said James Camp, managing director of fixed income at Eagle Asset Management.

But as the trend continues, market giants aren't the only ones that have benefited from buybacks. Kennedy-Wilson Holdings Inc., a real-estate investment company based in Beverly Hills, Calif., announced in mid-March that it would repurchase shares totaling $250 million, about a 10th of its market value, over the next 18 months. Within five weeks, it had already blown through half of that total with a combination of private transactions and a program where its bankers buy shares on their behalf when they drop below a certain level.

The buyback program, the company's biggest ever in its decade-plus stretch as a public company, appears to be working. Though the stock had been volatile along with the broader market earlier in the year, it started rising pretty much as soon as the program began. So far this year, shares are up 14%.

"The stock has been performing pretty well the last couple months relative to the rest of the market," said Matt Windisch, who oversees the company's buyback program. "Certainly the buyback played a role in that."

The buyback strategy is not infallible. Amgen Inc., the second largest buyer of its shares among reporting companies in the first quarter, repurchased $10.6 billion of shares in the first three months of the year. Its shares are down 1.8% this year.

That hasn't stopped companies from continuing to pump cash into buybacks. Amgen expects to buy back between $2 and $4 billion more of its stock in the second quarter, the pharmaceutical giant said.

Write to Ben Eisen at ben.eisen@wsj.com and Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

May 10, 2018 17:06 ET (21:06 GMT)

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