Apple Inc., Analog Devices Inc. and Garmin Ltd. are among the U.S. companies with the most firepower to extend the biggest surge in stock buybacks since the 1980s.
Apple has the highest percentage of cash to assets among 47 likely buyback candidates in the Standard & Poor’s 500 Index, followed by circuit maker Analog Devices, according to data compiled by Bloomberg. Garmin, a maker of navigation devices, led among consumer-discretionary companies on that basis.
Buyback announcements reached $208 billion in the first three months of the year, the busiest first quarter since at least 1985, according to Birinyi Associates Inc., the Westport, Connecticut-based research firm founded by Laszlo Birinyi. While Europe’s fiscal crisis and China’s slowing economy are curbing profit growth, the increase in buybacks signals that U.S. companies wary of expanding operations or adding jobs are still seeing value in their own shares.
“Companies are flush with cash and buyback authorizations are taking off,” Rob Leiphart, an analyst at Birinyi, said in a telephone interview. “While the economy is getting better, it is getting better very slowly. We are still seeing layoffs.”
The surge in buybacks is occurring even with the S&P 500 trading at a record level, suggesting that many companies still see further gains ahead for their stocks. And while the purchases may divert money that could otherwise be used to expand their businesses, companies that buy back stock may aid investors by boosting earnings per share.
In addition to examining cash and marketable securities as a percentage of total assets, the data compiled by Bloomberg focused on S&P 500 companies with price-to-earnings ratios lower than the market-cap weighted average for their sectors.
The companies also had gross margins and returns on common equity greater than zero, signaling profitability. They also bought less than 5% of their shares on average over three years, showing there’s room to start or expand buyback programs.
Financial companies, health-care providers and utilities that may have regulatory constraints on their cash were excluded, as was MetroPCS Communications Inc., which has agreed to be acquired by Deutsche Telekom AG.
Information technology companies accounted for 9 of the top 10 in cash to assets, in part reflecting their need to fund acquisitions and research. Increased cash flow now may give them the opportunity to pay for those needs and still do buybacks.
Among 14 information technology companies on the list, free cash flow per share rose 8.8% on average over the past 12 months, including an increase of about 29% for Apple.
“The technology sector certainly has a lot of excess cash flow and will lead the way in share repurchase activity and dividend growth,” said David Bianco, chief U.S. equity strategist for Deutsche Bank Securities Inc. in New York.
Apple is under pressure from investors including David Einhorn’s Greenlight Capital Inc. to put more of its $137.1 billion in cash and marketable securities to use. Greenlight is urging Apple to issue high-yielding preferred stock to carve out more cash for investors. Apple, whose shares have declined 38% from a Sept. 19 peak of $702.10, has said it’s considering buybacks or a higher dividend. The stock dropped 0.7% to $432.55 at 10:05 a.m. in New York.
“I believe Apple is buying back stock at this level,” said Laurence Balter, chief market strategist for Oracle Investment Research in Fox Island, Washington. “All of the stars are aligned: The stock is very cheap and they have the cash.” He rates Apple as strong buy.
The iPhone maker in March 2012 authorized the repurchase of $10 billion in shares over three years starting Sept. 30.
Apple’s cash and marketable securities led the list at 69.9% of assets, just ahead of Analog Devices at 69.7%. Analog Devices had more than $500 million left for buybacks, Chief Financial Officer David Zinsner told analysts in February.
“My model assumes they do buybacks in the coming quarters,” spurred by a 14.6% increase in free cash flow annually through 2014, Shawn Webster, an analyst at Macquarie Capital USA Inc. in New York, said of Analog Devices.
Analog Devices’ shares increased 0.6% to $45.38 today, extending its year-to-date gain to 7.9%.
Steve Dowling, a spokesman for Cupertino, California-based Apple, and Ali Husain, a spokesman for Norwood, Massachusetts- based Analog Devices, declined to comment.
Garmin, the maker of navigation and communications devices, had cash and marketable securities of about 60% of assets, ranking first on that basis among four consumer- discretionary stocks. As a sector, cash among those companies averaged about 23% of assets. Its price-earnings ratio also is about 50% cheaper than its peers in the sector.
In February, Garmin directors authorized the repurchase of $300 million of shares. The Schaffhausen, Switzerland-based company declined further comment, Ted Gartner, a spokesman, said yesterday by e-mail.
“I expect that Garmin will exercise a meaningful portion of its approved buyback before the end of 2013,” James Faucette, an analyst at Pacific Crest Securities in Portland, said in an April 9 e-mail. He has a rating of outperform, the equivalent of a buy, on the shares, which have fallen about 16% so far this year.
Some of the companies on the list are just starting buybacks. Milwaukee-based Joy Global Inc., the world’s second- largest maker of mining equipment after Caterpillar Inc., will probably announce a repurchase plan in this year’s second half, CEO Michael Sutherlin told analysts on a call in February.
While Sutherlin didn’t specify the likely size of the repurchase plan, it may total $500 million to $1 billion, according to Larry De Maria, a New York-based analyst at William Blair & Co. who has an outperform rating on Joy Global.
“It would obviously benefit 2014 more, but we’d see some benefits this year too,” De Maria said in a phone interview.
Sandy McKenzie, a Joy Global spokeswoman, declined to comment.
In the first three months of 2013, companies already authorized 278 buybacks valued at $208.1 billion, putting them on pace for $833 billion on an annual basis, according to Birinyi’s Leiphart. Authorizations totaled $863 billion in 2007, their biggest year. In the first three months of 2012, companies authorized 210 buybacks totaling $126.6 billion, data compiled by Birinyi show.
Actual buybacks by S&P 500 Index members will rise to about $450 billion this year if markets remain stable, said Howard Silverblatt, senior index analyst at Standard & Poor’s. While that’s up from $400 billion in 2012 it would trail a record $589 billion in 2007, the year before the collapse of Lehman Brothers Holdings Inc. froze credit markets and deepened the longest recession since the Great Depression.
Record earnings and tepid U.S. economic growth predicted for 2013 support the environment for buybacks, said Nicholas Colas, chief market strategist at ConvergEx Group in New York.
Earnings by S&P 500 companies are poised to hit a record $111.18 a share in 2013, up from $102.94 last year, according to Nick Raich, who studies corporate earnings trends as founder and chief executive officer of the Earnings Scout, an independent macroeconomic research firm based in Cleveland.
It won’t be a steady ride toward the record, with profit growth building throughout 2013 after a slow start. The overseas slowdown may have triggered a 1.8% drop in first-quarter earnings for the S&P 500, the first decline in more than three years, analysts’ estimates compiled by Bloomberg show.
The U.S. economy may expand 2% this year, less than the 2.2% in 2012, according to the median estimate of 92 economists. U.S. payrolls grew by 88,000 workers in March, the smallest gain in nine months and less than the most-pessimistic forecast in a Bloomberg survey.
For some companies, the changing conditions make investing in their own stock a safe bet. Even billionaire Warren Buffett, who once described buybacks as a cop-out for unimaginative executives lacking other options for their money, last year cleared the way for more repurchases at Berkshire Hathaway Inc.
“The major strategy for companies to distribute money is now buybacks,” Charles Biderman, CEO of TrimTabs Investment Research, said by telephone from Sausalito, California. “Companies have this huge amount of cash and they don’t see demand growing. They are not hiring.”