Buybacks rule

Since 2009, companies on the S&P 500 index have spent more than US$2 trillion buying their own stock.

When investors sell shares in the stock market these days, there’s a good chance the buyer is the same company that issued the shares in the first place, reports Bloomberg.

In 2014, stock repurchases by US companies averaged US$46.1 billion a month, for a total of US$550 billion. Since 2009, companies on the S&P 500 index spent more than US$2 trillion buying their own stock. Data compiled in October 2014 showed that, by the end of that year, companies were set to spend 95% of their earnings on buybacks and dividends.

The US$550 billion that executives spent on shares last year exceeded inflows from mutual funds and exchange-traded funds by US$468 billion — a huge gap. The previous year, the gap was US$318 billion. As a result, share buybacks have been the main source of money fueling the bull market that is now entering its seventh year.

This causes a virtuous circle. The share price of companies that repurchase their stock surpasses that of companies that use most of their cash on capital expenditures, according to research by Barclays Plc, as reported by Investment News. Bloomberg notes that, while the S&P 500 was up 1.6% in the past year, the S&P 500 Buyback Index, containing the 100 companies with the highest repurchase ratio, gained 4% over the same period.

The virtuous circle of stock appreciation through buybacks also has a vicious side, according to William Lazonick, professor of economics at the University of Massachusetts Lowell. “Companies use a phony ideology, saying if you maximize your shareholder value you somehow increase the efficiency of the economy,” Lazonick told Bloomberg. “But the only justification for doing it that holds water is that executives get a lot of their income from buybacks.”