Investors trying to explain the resilience of American equities during a global sell-off may want to consider the pace at which companies are repurchasing shares.
About 79% of buyback orders at The Goldman Sachs Group Inc.'s corporate trading desk were active May 24, the most this year, according to a note to clients obtained by Bloomberg News.
Companies stepped up purchases as the S&P 500 fell as much as 3% from an intraday record reached May 22.
The buybacks may have limited losses in American equities after shares in Japan fell the most in two years May 24 and stock markets from London to Paris and Frankfurt saw declines of more than 2% that day.
“The overall buy-the-dip mentality is very, very prevalent,” said Jim Welsh, who helps oversee $6 billion at Forward Management LLC. “When you have corporate buybacks, it's kind of like a support underneath the market.”
$275 BILLION
Companies authorize buybacks and carry them out from time to time through brokerage firms as a way to reduce outstanding stock and increase per-share earnings.
U.S. firms have announced about $275 billion of repurchases this quarter, the highest total in more than five years, Jeffrey Kleintop, chief market strategist at LPL Financial Holdings Inc., wrote in a recent report.
Aflac Inc. (AFL), the largest provider of supplemental health insurance, plans to buy back $600 million in stock this year, chief executive Dan Amos said during a recent presentation to investors.
Merck & Co. (MRK), the second-biggest U.S. drug maker, reached a deal to repurchase $5 billion of its shares from Goldman Sachs as part of a buyback program announced last month, according to a statement May 21.
“A lot of these corporate buybacks are on autopilots. In other words, the board authorized X amount of purchases, and these will be done over many months,” Mr. Welsh said.
“Whether or not it's to the discretion of Goldman, I don't know,” he said. “I do believe the amount of stock buybacks have definitely been helpful to the overall market.”
The Nasdaq Buyback Achievers Index, which consists of companies that repurchased at least 5% of their shares in the previous 12 months, has tripled since March 2009. That compares with a 144% gain in the S&P 500.
Shares in the S&P 500 are trading at about 15 times estimates for 2013 earnings, above the five-year average of about 13 times, according to a May 20 note from David Kostin, the chief U.S. equity strategist at Goldman Sachs.
