Apple to IBM push buyback to record trading as volume slows

Companies buying their own stock make up more of the U.S. equity market than ever before, underpinning share values even as the Federal Reserve prepares to reduce stimulus.

Stock acquired under company repurchase programs represented 6.4% of daily trading in the Russell 3000 Index by value through Sept. 30, exceeding 2007’s level of 4.1%, according to data compiled by Bloomberg and Birinyi Associates Inc. The proportion of trading is higher even as chief executive officers spend $343 billion less on buybacks so far this year, reflecting a seven-year decline in equity volume.

Apple Inc. to Walt Disney Co. and International Business Machines Corp. took advantage of record-low interest rates to raise an unprecedented amount of debt financing and repurchased stock, helping boost per-share U.S. earnings for four years. With cash at a record, buying by companies is poised to continue in a bull market that is about to enter its sixth year.

“The mathematics are pretty compelling,” Martin Leclerc, founder of Barrack Yard Advisors LLC and a 30-year veteran of investment management, said in a telephone interview Dec. 11. His firm oversees $260 million. “There will be continued shareholder buybacks, even increased shareholder buybacks, because things are pretty good.”

Stocks Beat

Gains in the 100 Standard & Poor’s 500 Index stocks with the most purchases relative to market value have beaten the full index this year, 40% to 27%, including dividends. Since March 2009, companies focused on buybacks have risen 270%, compared with the S&P 500’s 190%. Stocks fell 1.6% last week after speculation an improving economy would spur the Fed to cut stimulus as early as this week.

The S&P 500 climbed 0.7% to 1,787.95 at 10:33 a.m. New York time today.

Companies have helped offset trading lost as about $400 billion was withdrawn from mutual funds that invest in American stocks from 2009 through 2012. Buybacks as a proportion of the value of stocks traded have increased each of the last four years as companies purchased $1.88 trillion of shares since 2009, according to Birinyi and Bloomberg data.

Trading Falls

Stock trading fell every year since 2007, based on data for the Russell 3000, which is composed of companies representing 98% of the investable U.S. equity market, according to the Russell website. The data on buybacks compares the average daily value of repurchases each year compared with the overall value of shares changing hands.

S&P 500 earnings reached more than $100 a share last year, compared with about $60 in 2008, data compiled by Bloomberg show. They’re forecast to rise 5.3% to $109.40 in 2013, analyst estimates compiled by Bloomberg show.

“I don’t think we’re anywhere near the level of overall valuation where companies will not buy stock back,” Paul Zemsky, the head of asset allocation at ING Investment Management, which oversees $190 billion, said in a telephone interview Dec. 11. “Companies are still buying stock.”

The S&P 500’s price-earnings ratio has increased 17% this year to 16.7. While the multiple reached 17 last month, the highest level in almost four years, the average since 1998 is about 19, data compiled by Bloomberg show.

Apple, the world’s largest company by market value, borrowed $17 billion in its first bond sale since 1996 to help fund a $55 billion addition to its capital return plan. The offering was the largest on record until Verizon Communications Inc. sold $49 billion in bonds in September. Shares of the Cupertino, California-based company have rallied 25% since the April 30 announcement, more than the 11% gain in the S&P 500.

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