Investors trying to explain the resilience of American equities during a global selloff may want to consider the pace that companies are repurchasing shares.
About 79 percent of buyback orders at Goldman Sachs Group Inc.’s corporate trading desk were active Friday, the most this year, according to a note to clients obtained by Bloomberg News. Companies stepped up purchases as the Standard & Poor’s 500 Index fell as much as 3 percent from an intraday record reached Wednesday.
The buybacks may have limited losses in American equities after shares in Japan fell the most in two years and stock markets from London to Paris and Frankfurt saw declines of more than 2 percent. The S&P 500 closed yesterday down 0.3 percent, trimming gains to 16 percent in 2013.
“The overall buy-the-dip mentality is very, very prevalent,” Jim Welsh, who helps oversee $6 billion at Forward Management LLC in San Francisco, said in a phone interview. “When you have corporate buybacks, it’s kind of like a support underneath the market.”
The S&P 500 slipped 0.1 percent to 1,649.60 at 4 p.m. in New York, paring losses after falling as much as 0.8 percent.
$275 billion repurchases
Companies authorize buybacks and carry them out from time to time through brokerages as a way to reduce outstanding stock and increase per-share earnings. U.S. firms have announced about $275 billion of repurchases this quarter, the highest total in more than five years, Jeffrey Kleintop, chief market strategist at LPL Financial Holdings Inc., wrote in a report this week.
Aflac Inc., the largest provider of supplemental health insurance, plans to buy back $600 million in stock this year, Chief Executive Officer Dan Amos said at a presentation to investors this week.
Merck & Co., the second-biggest U.S. drugmaker, reached a deal to repurchase $5 billion of its shares from Goldman Sachs as part of a buyback program announced earlier this month, according to a statement on May 21.
“A lot of these corporate buybacks are on autopilots, in other words, the board authorized X amount of purchases and these will be done over many months,” Forward’s Welsh said. “Whether or not it’s to the discretion of Goldman or the investment bank, I don’t know. I do believe the amount of stock buybacks have definitely been helpful to the overall market.”
The Nasdaq Buyback Achievers Index, which consists of companies that repurchased at least 5 percent of their shares in the previous 12 months, has tripled since March 2009. That compares with the 144 percent gain in the S&P 500.
Shares in the S&P 500 are trading at about 15 times estimates for 2013 earnings, above the five-year average of about 13 times, according to a May 20 note from David Kostin, the chief U.S. equity strategist at Goldman Sachs in New York.