March 7, 2013 5:42 pm

US share buybacks at record amount

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Big US companies bought a record amount of their own shares in February, pushing overall stock purchases above the $1tn mark for the first time since the equity markets started to rebound in 2009.

Companies including Home Depot, Time Warner, General Electric and 3M bought back a combined $118bn worth of stock last month, double the amount purchased in the same period of 2012, according to data compiled by Birinyi Associates.

The boom comes after companies rushed to buy back shares late in 2012 ahead of changes to US tax laws following fiscal cliff negotiations in Washington, which led to a slow start for repurchases in January.

US companies have increasingly relied on buybacks to help lift their share prices as investors shifted their attention to other asset classes, such as corporate bonds.

Since 2009, when the US stock market hit a bottom following the financial crisis, companies have bought more than $1tn of their own stock, according to Rosenblatt Securities, and the buybacks are set to pick up pace in 2013.

The high volume of buybacks “is a function of companies being flush with cash and forced to do something with it”, said Rob Leiphart, analyst at Birinyi Associates. “Now that the tax laws are changing for dividends, buybacks offer companies the opportunity to deploy capital with the flexibility of adjusting it down the road.”

In addition, Mr Leiphart said corporate executives are often given compensation packages based on their companies earnings per share. That in turn provides an incentive for more buybacks.

“If all is the same and [executives] are reducing share count, EPS results go up.”

Buybacks have helped support a market rally on Wall Street that saw the blue-chip Dow Jones Industrial Average hitting its highest level on record this week. The broad S&P 500 is also approaching an all-time high, having gained 128 per cent since the stock market bottomed in March 2009.

“While corporations don’t do much in the way of direct equity investing, they do hold substantial cash piles that can have major implications for the market, specifically in the form of buybacks and M&A,” said Ana Avramovic, a strategist at Credit Suisse.

“Buybacks have indeed been picking up steam over the past few years. That, coupled with the fact that the IPO market has been largely dormant since 2008, means that on balance, corporations are sizeable net buyers of stock.”

US companies have accumulated high levels cash in the past few years as they have been reluctant to spend on research and development as well as hiring new employees amid uncertain global economic conditions.

Additional reporting by Michael Mackenzie

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