U.S. equities are on the move to break all-time highs despite the erroneous assumption that it was the ‘Average Joe’ who is responsible in driving the market and benefiting from the ride.
Truth of the matter is, the largest purchasers in recent years have been companies buying back purchases of their respective shares.
Share buybacks have been becoming more and more increasingly popular as more and more companies have transformed large cash piles and become much more pliable to rewarding shareholders.
With cheap currency along with the unwillingness to invest in new plant and machinery albeit a fragile economic recovery, had all in one way assisted buybacks to the path of a higher share price as a straight one. There are much fewer shares in issue which basically mean much higher earnings per share (assuming that all other things being equal).
Based on FactSet’s Buyback Quarterly, the present share repurchases expanded by well over 50 per cent year-over-year to $154.5 billion during the first quarter of 2014. With the S&P 500 quarterly buybacks are also at their peak level in more than seven years.
It has been regarded on the firm side in the information technology, industrial and material sectors that paved the way with buybacks as far as it outmatched cash inflows. In the materials sector, for instance, had allocated nearly $2 worth for every buybacks for $1 of adjusted free cash flow in the year to end by March of this year.
The question remains, will the trend slow down as high valuations and higher interest rates make buybacks much more hefty for traders?
As a small percentage of capitalisation, buybacks are at their highest level since the third quarter of 2011. The heightened buyback activity will persist to continue in the succeeding quarters ahead.
Analysts are not very sure that the good times will continue. They pointed out that five of the top 10 spenders during the first quarter of this year were not conventionally regarded as hefty spenders, while IBM and Apple who among the rest repurchased a colossal $27 billion between them in the quarter which appeared to be rather poised to slow their repurchasing activities for the quarter.
As some commentators and economists think, the buyback trend curb sustainable economic growth as companies bolster their respective earnings per share at the expense of extending their workforce or developing new ideas for new products. The notion that U.S. companies not investing in their businesses is a bit extreme although not precisely true.
Finally, it is to an extent true that U.S. companies are spending far more money on share buybacks than those in other regions. However, it is far from clear that the same have held them back from fully investing in various business opportunities.