The buyback is running out of steam as the engine that helps keep the US stock market moving forward...
The buyback is running out of steam as the engine that helps keep the US stock market moving forward.
While it is still a popular strategy, particularly with more traditional companies now out of favour in the tech-driven boom, it is doing little to attract investors. What was once an activity that led to a rewarding hike in share price is now considered the norm.
As ever there is a long list of large US companies announcing their intention to buyback their own shares. Anheuser-Busch, makers of Budweiser beer, Avon Products, multi-media company Gannet, pharmaceutical giant Merck and Wells Fargo have all made announcements in the last few weeks. Tim Chesterfield, US investment manager at Pavilion Asset Management, says: "Some of the old world companies outside the IT arena do this because the management believe that at this juncture, when everyone wants IT companies, they are being unfairly treated and that their stock is undervalued."
As a result they see now as a good time to buy back their stock and reduce their issued share capital and push up their P/E ratio.
Even so the traditional bullish reception that such an announcement used to bring has evaporated with fund managers no longer seeing a buyback as the signal for optimism it once was.
"It is fair to say that a while ago people would look for companies to buy back stock as a vote of confidence," Chesterfield says, "but what people look for now is topline growth."
Neil Smeaton, US fund manager at Scottish Equitable says that he believes buy-back had become less of a market feature than it used to be, and predicted that it would continue to wane.
He forecasts that higher corporate debt in the US, greater corporate investment in technology, and an erosion of the link between the announcement of a big buyback and an instant increase in share price were depressing buyback rates.
"I'm not sure that it will ever drop away completely," he says, "but it will become even less of a feature than it is now. American companies have less cash than earlier in the economic cycle. Their debts are higher and they are spending more on technology."
He thinks that the days when the announcement of a 5% buyback by a company would see an automatic boost in share price were gone.
Overall investors are more wary of buy-back promises, Smeaton says but he adds that this often indicated that there was value to be exploited.
"It doesn't necessarily say that this is the right day to start buying, but it does indicate that ultimately there is value there if you can look over the short-term investment horizon," he says.
Terry Ewing, head of US equity at Britannic Asset Management, agrees that a lot of old world companies have been left out in the cold in the rush by mutual funds and private investors to off-load underperforming stock in favour of high-growth technology shares.
"Fund managers have been forced to sell stocks and that has caused a snowball effect," he says. "That is why there have been some extremely low level valuations."
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