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U.S. companies see smaller lift from stock buybacks

The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011. REUTERS/Nir Elias
The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv October 24, 2011. REUTERS/Nir Elias

By Caroline Valetkevitch and Chuck Mikolajczak

NEW YORK (Reuters) - IBM, one of the most reliable companies when it comes to buying back shares, is scaling back its repurchases just as the market seems to have grown weary of this strategy.

Buybacks have been fruitful for companies and shareholders in recent years. Firms with larger buybacks outperformed the market for several quarters, but that streak is in jeopardy, as the S&P 500 Buyback Index is down 0.2 percent for the quarter.

The index, made up of 100 companies with the largest buyback ratio, is facing its first quarterly decline since the second quarter of 2012, when it was down 3.7 percent. It has outperformed the S&P 500 in the last six quarters but trails the broader benchmark so far in the second quarter.

Corporate buybacks have been strong in recent years, but higher stock valuations reduce the lift companies get from their repurchases. As economic growth improves, companies are more likely to invest in longer-term projects, such as capital expenditures.

"With valuations not as attractive as where they were, it makes sense that investors are going to be a bit more selective and not reward buybacks as broadly as they had for the last couple of years," said Jill Carey, U.S. equity strategist at Bank of America Merrill Lynch in New York.

"If growth starts to pick up, we think companies should start to do more investing in growth: capex or M&A."

S&P 500 companies that initiated buybacks in the first three months of 2014 underperformed the benchmark index by 0.25 percent in the month after announcing, while a similar group outperformed the index by 1.29 percent in the same period a year ago, date from Birinyi Associates showed.

A quarter of the biggest buybacks have come from the pricey consumer discretionary sector, Carey said. The sector's forward four-quarter P/E ratio is 17.8, above the S&P 500's 15.2, Thomson Reuters data showed.

With at least $153 billion executed in the first quarter, S&P 500 buybacks could mark the second-biggest total ever once final numbers are tallied, according to S&P Dow Jones Indices. Apple accounted for $18 billion of the total.

To be sure, companies with ongoing buyback programs tend to benefit more than others, said Tobias Levkovich, chief U.S. equity strategist at Citigroup in New York.

"Buying back your stock for a short-term pop in your earnings isn't going to get rewarded by the Street, if it is only a short-term phenomenon," he said.

A Citigroup index of companies that consistently buy back shares has more than doubled the S&P's return dating to 2002. This group includes IBM.

IBM spent more on buybacks than any S&P 500 company other than Exxon Mobil in the last five years. It said in its recent earnings call that it expects to finish the year with repurchases down a bit from last year. For 2013, the company's buybacks totaled about $13.9 billion.

Its shares are down 3.4 percent in the second quarter, after gaining 2.6 percent in the first.

(Additional reporting by Ryan Vlastelica; Editing by Nick Zieminski)

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