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Buybacks Are Back In Fashion

21 February 2014 in Trading Ideas

Lost in the discarded quest by investor Carl Icahn to persuade Apple to boost its stock repurchase program is the notion that the buyback continues to be embraced more than ever by the nation’s top companies, including Apple.

In fact — Icahn waved a proverbial white flag last week when he found himself on the short end of a recommendation by proxy-advisory firm Institutional Shareholder Services against Icahn’s recommendation that the company repurchase up to an additional $50 billion of its own stock.1

Icahn cited the fact that Apple had just repurchased $14 billion of its own shares, and really, at that pace, what’s another $32 billion or so between friends?

But Apple’s opening of its corporate wallet is just an outsized example of the current corporate mindset. In just the past few weeks, we’ve seen increased stock buybacks by the likes of Analog Devices, 3M, BP and Novartis.

However, this trend isn’t recent either. As the Wall Street Journal reported at the end of last year, both share buybacks and dividends have approached levels unseen since before the financial crisis in 2008, as persistent economic uncertainty prompts cash-rich companies to reward shareholders instead of pursuing new investments in other activities.2


In last year’s third quarter, US companies bought back $128.2 billion shares, the highest level since the fourth quarter of 2007. Combined buybacks and dividends totaled $207 billion in the third quarter, also the highest in six years.

As the Journal explained late last year, the market’s run-up of more than 13% in the last four months of 2013 could be partly explained by those big corporate payouts. The moves bolster confidence in the rally, while a 2.7% interest rate on a 10-year Treasury just can’t compete.

The buyback trend also unsurprisingly makes the stocks of companies with buyback authorizations that much more attractive. The Buyback Leaders motif has gained 4% in the past month. In that same time, the S&P 500 is flat.

Since the motif’s creation in May 2013, the motif is up 23.8%; the S&P 500 has increased 12.2%.

Broader measures suggest an even sharper contrast, the Journal said. The S&P 500 Buyback Index, which measures the 100 stocks with the highest buyback ratios, has surged about 45% in 2013, compared with a rally of nearly 30% for the S&P 500. The buyback ratio accounts for the amount of cash paid for common shares over the past four quarters divided by the market capitalization of the common stock.

A longer time frame shows a consistency in this disparity: at the end of 2013, the Buyback Index was up 27% on a five-year annualized basis, including dividends, compared with a 19% gain for the S&P 500.

Still, not everyone is on the buyback bandwagon, especially as repurchases are coming with the market again near all-time highs and share valuations above their historical average.

As the Journal pointed out, some investors are questioning the buyback’s popularity, saying they would get a better return if companies spent their money on research and development and expanding their operations.

On the other hand, companies able to show off their mountains of cash may have some leeway to show the prevailing way of doing things has been hard to beat.

1Steven Russolillo, “Carl Icahn Drops Apple Buyback Proposal,” WSJ.com, Feb. 10, 2014.

2Steven Russolillo, “Companies Binge On Share Buybacks,” WSJ.com, Dec. 25, 2013.