Stock buyback zeal undimmed by prospects for Fed rate hike

Fri Apr 10, 2015 1:57pm EDT
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By Rodrigo Campos

NEW YORK (Reuters) - The seemingly insatiable appetite of companies for their own stock is unlikely to be satisfied soon, even if the U.S. Federal Reserve begins to hike benchmark interest rates and shares get pricier.

That would extend a pattern established in the last round of Fed tightening, according to a Reuters analysis of historical data. Many market analysts expect that higher borrowing costs won't derail the buyback boom that has been bolstering stocks.

Buybacks may lift earnings per share of companies in the Standard & Poor's 500 index by between 1.5 and 2 percentage points this year, according to estimates from Voya Investment Management in New York. With earnings estimates now calling for 1.5 percent growth for all of 2015, buybacks could make the difference between positive and negative growth in S&P 500 EPS.

Companies have ramped up stock repurchases since the practice bottomed for this cycle in 2009. Buybacks reduce the number of stocks in circulation, thereby boosting prices and calculated earnings per share.

General Electric Co. said today it plans to buy back as much as $50 billion of its stock, the second largest ever after Apple's $90 billion plan. GE shares rose about 9 percent to its highest since the financial crisis in afternoon trading on the New York Stock Exchange.

In 2014, while the S&P 500 rose to record highs, component companies spent $553 billion on share repurchases, according to S&P Dow Jones Indices data - a 16.3 percent increase from the previous year and four times as much as they did in 2009.

The buyback spree has accelerated this year. Pending and completed buybacks at all U.S.-based traded companies in the first quarter rose to $179.7 billion compared with $124.2 billion in the first quarter of 2014, up almost 45 percent, Thomson Reuters data show.

"Corporate management wants to do this trade," said Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions at Voya Investment Management. "It's being rewarded by the market, and it's cheap to do."   Continued...

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.  REUTERS/Jonathan Ernst