Corporations can’t stop gobbling up their own stock

The Washington Post reports:

Standard & Poor’s 500-stock index spent $477 billion last year buying back their own shares, a 29 percent increase over 2012 and the most since the peak year of 2007. The idea behind buybacks is that they are a tax-advantaged way to return profits to shareholders by boosting the market price of their shares. Since the stock market tends to value companies by multiplying the profits per share times the number of shares, reducing the number of outstanding shares has the arithmetic effect of boosting the stock price.

Buying back shares is so in vogue that 80 percent of the S&P 500 did it over the past year, according to Kiplinger. Among the more aggressive have been Boeing, Caterpillar, Cisco, 3M, Microsoft, Safeway and Travelers, who all bought back more than 10 percent of their shares, reports Zero Hedge, the widely followed investor Web site. Apple alone has announced it would spend $130 billion to repurchase shares. Last week, Ford joined the parade with an $18 billion buyback.

And make no mistake: In the short term, the buyback strategy works. Stock buybacks in the S&P 500 transformed what would have been an 80 percent rebound from the lows of 2009 into a 178 percent increase, according to a study by Fortuna Advisors.

It would be one thing if most of these stock buybacks were paid for out of the trillions of dollars in cash now sitting on corporate balance sheets. But as it happens, most of them have been paid for by near-record levels of corporate borrowing. Of the $3.4 trillion in additional debt taken on by nonfinancial corporations since 2009, nearly 87 percent has been sent off to shareholders in the form of dividends and stock buybacks, according to Paradarch Advisors.

Bull market by buy back.