YTD Biggest Buyback Companies Trailing S&P In Stock Appreciation

John Seward
July 24, 2014

Stock buybacks are running at a near record pace in the year to date, but contrary to expectations, those with the highest buy-back ratios have trailed the S&P 500 index.

The S&P 500 Buyback Index, which tracks the 100 companies with the highest buy-back ratios, is up 7.6 percent so far this year, compared with 8.7 percent for the S&P 500.

Morningstar's Josh Peters said companies are currently engaging buybacks at the fastest rate of the current expansion. In fact, at $159 billion in the first quarter, the pace just a whisker below the fastest in history, $172 billion recorded in 2007.

“That record just happens to coincide with the all-time peak in the stock market prior to the crash," Peters told the Morningstar site. Peters said there is insufficient evidence to call a market peak.

But when companies are flush with more cash than they know what to do with, stock prices tend to be high. When the stock is cheap, companies tend not to be generating cash.

"It's an automatic problem built into the buyback issue," Peters said.

Leading up to the 2008 crash, big banks massively repurchased shares, and then subsequently reissued them at a fraction of the price to shore up balance sheets and resulting in significant dilution for shareholders, Peters said.

"I'd much prefer a special dividend if companies have excess cash," Peters said.

Johnson & Johnson (NYSE: JNJ) on Monday said its board an additional $5 billion in stock buybacks. Caterpillar (NYSE: CAT) on Thursday said it will buy back $2.5 billion worth of shares in the current quarter; Qualcomm (Nasdaq: QCOM) said this week it will buy back $1 billion worth of shares in the current quarter.

American Airlines (NYSE: AAL) announced a $1 billion buy back Thursday; United Continental Holdings (NYSE: UAL) unveiled a $1 billion, three-year plan also Thursday.

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