Companies in the Standard & Poor's 500 index really love their shareholders. Maybe too much.
They're poised to spend $914 billion 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 U.S. 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 $9 billion 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 maximizing 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 scheduled to announce financial details.
Buyback Index
U.S. equities rebounded from last week's retreat, with the S&P 500 rising 0.4% at 9:55 a.m. in New York. The S&P 500 Buyback Index is up 7.5% this year through Oct. 3, 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 $3.59 trillion in cash and marketable securities and they've raised almost $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 $2.8 billion, 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."
Earnings Barrier
S&P 500 companies will spend $565 billion on repurchases this year and raise dividends by 12% to $349 billion, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach $964 billion should the 8% growth forecast by analysts tracked by Bloomberg come true.
Profits climbed to about $230 billion over the last three months, based on analyst forecasts. That compares with total buybacks and dividends of about $235 billion, 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 there, but it doesn't go much above that."
Aging Plants
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.
