NEW YORK – Stock buybacks are falling to a three-year low just as chief executive officers boost spending on plants and equipment to a record.
Companies announced $1.1 billion of repurchases a day on average during the earnings season in April and May, the lowest level since mid-2009, according to data compiled by Bloomberg and TrimTabs Investment Research Inc. Capital spending in the United States has risen since 2010 and reached $63.6 billion in March. Devon Energy Corp. eliminated buybacks and boosted exploration and production spending 18 percent. United Parcel Service Inc. cut repurchases in order to buy TNT Express NV.
After the biggest first-quarter gain for the Standard & Poors 500 Index since 1998, bears say the 58 percent decline in buybacks removes key support for equities amid Europes debt crisis and a weakening U.S. recovery. While orders for capital equipment fell in April, bulls say the two-year gain in business investment shows CEOs are growing more optimistic, spending to raise profits instead of reducing stock to boost per-share earnings.
Investors and corporations themselves are best served when the cash is applied to improving capital investment, as opposed to buying stock back, Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion, said in a May 22 phone interview. That would be much more bullish.
Companies purchased about $708 billion of shares in 2010 and 2011 as $1.27 trillion was added to U.S. equity values, according to S&P and Bloomberg data. The buybacks coincided with the rally that has lifted the S&P 500 by 95 percent since March 2009. The spending helped buoy stocks as investors pulled $167 billion from U.S. equity mutual funds, data from Washington- based trade group Investment Company Institute show.
Announced buybacks slipped to $21.7 billion in April and $6.1 billion heading into late May, on pace for the lowest level since September 2009, according to Sausalito, Calif.-based TrimTabs. During the earnings season a year earlier, buybacks averaged $2.6 billion a day, the data show.
JPMorgan Chase, the biggest U.S. bank by assets, suspended its $15 billion program after at least $2 billion in losses related to wrong-way bets on illiquid credit derivatives.
As buybacks diminished, companies continued to return cash through dividends, keeping the payout yield on the S&P 500 near its decade average of about 2 percent. The slowdown in repurchases removes some of the biggest buyers from the market, said Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust.
The demand to own shares is dropping, Hyzy said in a May 23 phone interview from New York. The ability to stabilize the market at a time when the retail investor and other investors arent fully in is limited.
Devon, the third-largest U.S. independent oil and natural-gas producer, plans no buybacks as it boosts exploration and production spending to as much as $6.5 billion this year.
Were going to take a breather for the time being on share buybacks, Chief Executive Officer John Richels of the Oklahoma City-based company told analysts on an April 4 conference call. We have enough confidence, and were bullish enough about these opportunities in our opportunity set, that we just see that as a better allocation of that capital.
UPS, the worlds biggest package-delivery company, last month reduced its planned buybacks for this year to $1.5 billion from $2.7 billion, reserving cash for its acquisition of TNT, the biggest purchase in the Atlanta-based companys 105-year history.
You would want to view buybacks in the context of the other major uses of corporate cash, Thomas OHalloran, a Jersey City, N.J.-based money manager at Lord Abbett & Co., which oversaw about $110.4 billion as of Dec. 31, said in a May 23 interview. When these are factored in, the corporate behavior is probably neutral to bullish.