S&P 500 firms to spend US$914bil

The amount is allocated for share buybacks and dividends this year

Companies in the Standard & Poor’s 500 Index really love their shareholders. Maybe too much.

They’re poised to spend US$914bil on share buybacks and dividends this year, or about 95% 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 to Jonathan Glionna, head of US 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% since March 2009. Now, with returns slowing, 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 US$9bil 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 maximising the ability to do those buybacks.”

S&P 500 constituents will probably say earnings rose 4.9% 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

Buybacks are something corporations can take control of. - Randy Bateman

scheduled to announce financial details.

US equities retreated last week, with the S&P 500 losing 0.8% to 1,967.9. The S&P 500 Buyback Index fell 0.7%. The gauge is up 7.5% this year, compared with the 6.5% 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 US$3.59 trillion in cash and marketable securities and they’ve raised almost US$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 US$2.8bil, 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 US$565bil on repurchases this year and raise dividends by 12% to US$349bil, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach US$964bil should the 8% growth forecast by analysts tracked by Bloomberg come true.

Profits climbed to about US$230bil over the last three months, based on analyst forecasts. That compares with total buybacks and dividends of about US$235bil, 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 S&P show.

“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% earnings is a barrier. It can bounce around here and doesn’t go much above that.”

Excluding the recession years 2001 and 2008, dividends and stock buybacks have represented, on average, 85% of corporate earnings since 1998. The last time payouts exceeded income in 2007, the buyback index fell 4.7%, compared with a 3.5% 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% , 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% 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 US$2 trillion have helped buoy the bull market since March 2009. The S&P 500 has gone without a 10% decline for three years and is up 191% amid a 5½-year bull run.

Even as sales were stuck at an average growth rate of 2.6% a quarter in the past two years, per- share earnings expanded more than twice as fast, 6.1% , data compiled by Bloomberg show. – Bloomberg

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