By Ben Eisen and Akane Otani
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 11, 2018).
U.S. companies are buying back their shares at a record pace,
providing support 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 bought $158 billion of their own stock in the
first quarter, according to S&P Dow Jones Indices. That is on
pace for the biggest amount in any quarter, based on data going
back to 1998. About 85% of S&P 500 components have reported so
far.
The move 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 businesses are also raising dividends swiftly. S&P
500 companies are on pace to have returned almost $1 trillion to
shareholders for the 12 months through March through 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 Charles 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% this year, after the
company bought back $3.8 billion in shares in 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 said 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 in Beverly Hills, Calif., said in
mid-March that it would repurchase shares totaling $250 million,
about one-tenth of its market value, over the next 18 months.
Within five weeks, it had already spent half of that total in 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. Shares are up 14% this year.
"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 isn't infallible. Amgen Inc., the
second-largest buyer of its stock 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 billion 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 11, 2018 02:48 ET (06:48 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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