Corporate cash spent on stock buybacks is delivering less bang for the buck because stock prices are at or near all-time highs. That means buyback yield - the percentage of shares outstanding repurchased, during the past 12 months, say - is falling for the S&P 500 even as the dollar value of buybacks rises.
^SPX data by YCharts
FactSet (NYSE:FDS) reports the buyback yield for the S&P 500 for the 12 months ended March 31 was 3.3%. That cost the component companies in the index $525.2 million. During earlier period - even during the buyback mania of 2007 - buybacks were more productive, with a 4.9% buyback yield back then.
Buybacks, of course, can be very shareholder-friendly, reducing shares outstanding and thus giving remaining holders a larger stake in the company. When companies ill-time the buybacks by purchasing when shares are most dear, however, repurchases don't look so smart. And certainly indulging in buybacks to the detriment of credit quality, liquidity and the ability to fund investments in the ongoing business can be ruinous.
We've written in the past about screening buybacks against liquidity; How to identify smart buybacks; Companies that, but for buybacks, would be reporting negative EPS numbers; Knucklehead buybacks (and how to find smart ones); and AutoZone (NYSE:AZO), the company replacing DirecTV (DTV) as the new buyback champ.
A screener can be useful for quickly perusing a large group of stocks. Here, the YCharts Stock Screener provides the S&P 500 ranked by buyback yield, and also listing 1-year price performance and the forward PE ratio to provide suggestions on whether the buyback activity was efficient or not.
ADT data by YCharts
Aggressive buybacks since its October 2012 spinoff from Tyco (NYSE:TYC) have cut deeply into shares outstanding at ADT (NYSE:ADT) and the most recent buybacks are been more efficient due to a lower stock price. But ADT's home alarm business is threatened by cable TV companies and by other new entrants. And even with the decline in price, its shares are trading at a forward PE ratio of about 18.
IBM data by YCharts
IBM's (NYSE:IBM) buybacks look highly efficient, as its forward PE ratio is barely above 10 right now. The company has promised EPS of $20 in 2015 and it will take more buybacks to goose the per-share numbers. But the big question, of course, is revenue, which hasn't been growing and is threatened by cloud computing competitors and other low-cost technologies.
IBM Revenue (TTM) data by YCharts
Laboratory Corp. of America (NYSE:LH) made large buybacks have continued as its valuation, measured by forward PE ratio, rises. There are business challenges, too. Private insurers and the government are trying to reduce the cost of medical testing. And the domination of LabCorp and Quest Diagnostics (NYSE:DGX) over this business, long unquestioned, could be challenged by a disruptive upstart.
LH data by YCharts
The first quarter of 2014 may be a high water mark for buybacks for a while, FactSet concludes. Some companies - like IBM - appear to have shot most of their 2014 buyback wad during the quarter. And if stock prices keep rising, that may deter some others.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.