Could they be buying high again? Cheap money and a dearth of investment opportunities has helped push buybacks' dollar value back near their precrisis peak. Companies in the S&P 500 increased share repurchases by 29% during the three months through January 2014 compared with a year earlier, according to FactSet.
Buybacks and bull markets are self-reinforcing. By reducing shares outstanding, repurchases flatter earnings per share, making stocks look more attractive. During the reporting season that just ended, earnings growth slowed to a crawl and likely would have been negative without buybacks. They are likely to play an important role again in the earnings season that kicks off this week.
The bang for the buyback buck is diminishing, though, requiring more cash to remain effective. During the 12 months through January, S&P 500 companies spent a whopping $478 billion to repurchase 3.1% of shares outstanding. A year earlier, they spent about $90 billion less for the same percentage reduction. Given today's higher values, companies will have to spend tens of billions more. If buybacks slow, so will earnings growth, all else being equal.
