Buyback Binge Takes a Breather

The buyback bonanza is showing signs of slowing.

Companies in the S&P 500 repurchased less shares in the second quarter than they did a year ago, suggesting one of the major pillars of the stock market’s record-breaking rally could be losing some steam.

U.S. companies repurchased $116.2 billion worth of stock in the three-month period ending June 30, down 1.6% from a year ago and off 27% from the first three months of the year, according to S&P Dow Jones Indices. First-quarter results were skewed by Apple Inc.(AAPL), which repurchased a record $18 billion in stock. In the second quarter, the iPhone and iPad maker bought back $5 billion worth of shares.

Slowing buybacks could be a potential cause for concern. As WSJ reported last week, companies have significantly boosted their buybacks since the financial crisis, a trend that investors have rewarded. Companies with the largest buyback programs by dollar value have outperformed the broader market by 20% since 2008, according to an analysis by Barclays.

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While there is no way to precisely measure the impact stock repurchases have on the market, some traders and investors say the buying at least provides support for stock prices.

More companies are still reducing their number of shares outstanding, which can cause a company’s earnings per share to increase at a faster pace relative to actual profits.  For instance in 1993  International Business Machines Corp. had 2.3 billion shares outstanding. Today, it has about 1 billion. The stock is up more than 900% in that time frame.

Some 295 S&P 500 companies reduced their share counts in the second quarter, five more than in the first quarter and up from 223 a year ago, according to Howard Silverblatt, senior earnings analyst at S&P Dow Jones Indices.

“By reducing their share count, more companies are adding tailwinds to their [earnings per share],” Mr. Silverblatt said. In the second quarter, 23% of S&P 500 companies reduced their year-over-year share count in order to push up their EPS, compared to 20% in the first quarter and 12% a year ago, he noted.

Some investors applaud buybacks as an appropriate way to return cash to shareholders. Buybacks have a similar impact as dividends, although they offer more flexibility and come without a tax bite for shareholders.

Critics, however, say companies often buy back their stock when it is expensive and instead should use their cash in other manners, such as reinvesting in the business,  boosting hiring or making acquisitions.

Apple, IBM and Exxon Mobil Corp.(XOM) spent the most on buybacks in the second quarter. Apple repurchased $5 billion worth of stock, IBM bought back $3.6 billion of its stock and Exxon repurchased $3 billion of stock. Four of the top 10 companies that bought back the most stock hailed from the tech sector, including Intel Corp.(INTC) and Oracle Corp.(ORCL)

–Dan Strumpf contributed to this report.