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The Journal Gazette

Tuesday, January 02, 2018 1:00 am

Share buybacks passť, some say

Rising economy, high prices cited; not everyone agrees

Elena Popina and Sarah Ponczek | Bloomberg

Worried that American CEOs will blow their big tax windfall on share buybacks? A theory circulating on Wall Street says don't be: Soaring valuations and a buoyant economy are making the tactic passť.

If only it were that simple.

“We're in front of a major tax reform that will increase the amount of cash that corporations have,” said Tim Ghriskey, chief investment officer at Solaris Asset Management. “I know that Republicans believe that the extra money is going to be used to stimulate growth. I don't think so.”

The theory that corporate America is losing its taste for repurchases has its roots in a striking phenomenon. S&P 500 companies announced the intention to purchase $568 billion of their own shares through the first 11 months of 2017. While hardly a pittance, it was down 10 percent from a year ago and on pace to be the first decrease since 2008 in data compiled by Birinyi Associates.

That's caused ears to perk up – paring buybacks in the middle of a bull market is virtually unprecedented. In the two prior economic cycles, it took full-blown recessions to convince companies to rein in repurchases. Measured in dollars, buybacks expanded for eight straight years before reversing in 2000, and four years before 2008.

Other market trends have instilled hope that even shareholders are getting sick of the tactic and would prefer to see the money plowed back into businesses. For one thing, shares of companies doing the most capital spending are beating those with an emphasis on buybacks and dividends by almost 2-to-1 in the S&P 500 Index this year, the biggest gap ever.

Then there's the S&P 500's price-earnings ratio, currently above 22.3.

Could shares have become so expensive that even companies are balking at their prices? Maybe soaring valuations will deter repurchases and spur firms to spend their money elsewhere.

Says Jim Paulsen at Leuthold Group, the chief investment strategist at Leuthold Weeden Capital Management: “It isn't so much they pulled away from share buybacks. It's that they now have more productive uses for their cash.”