NEW YORK — U.S. companies are sitting on a record pile of cash after spending the lowest proportion of their profits on stock buybacks since 2003, a sign that repurchases may propel the equities rally as earnings recover.
Buybacks by companies in the Standard & Poor's 500 Index totaled $137.6Â billion last year, or 28 percent of operating profit, according to S&P. The last time the ratio dropped to that level, the S&P 500 subsequently climbed for four years. U.S. firms will almost double their spending on stock repurchases to $235Â billion in 2010 as earnings surge, according to Mizuho Financial Group Inc.
S&P 500 companies, excluding financials, that bought their own stock in fiscal 2009 have rallied an average of 7 percentage points more than the index since the start of last year as the purchases reduced the supply available to investors, according to Bloomberg data. More than 200 U.S. companies, from PepsiCo to United Technologies, have announced buyback plans this year, data from Birinyi Associates show, as the S&P 500 extended its one-year surge to 74 percent.
"The acceleration of buybacks is a positive," said Eric Teal, who oversees $4.5Â billion as chief investment officer at First Citizens BancShares in Raleigh, N.C. "It's showing that the recovery is translating itself into an expansion."
Repurchases by S&P 500 companies increased during the third and fourth quarters of last year, the first consecutive gains since 2007, as the economy pulled out of its deepest recession since the Great Depression and a record nine quarters of profit declines ended.
S&P 500 companies are turning to share buybacks after cash climbed to a record $831.2Â billion at the end of the fourth quarter, according to data from S&P that goes back to 1980. That was the fifth straight increase from the prior quarter. Cash represents 11.4 percent of assets at companies outside the financial industry, the highest level in more than 50 years, according to Tokyo-based Mizuho.
"There's cash sitting there, waiting to come in later, which will then later help buoy both businesses and stocks," said Kenneth Fisher, who oversees more than $35Â billion as chairman of Fisher Investments Inc. in Woodside, Calif. "This bull market will carry on for several years."
Bank of America and Citigroup used equity offerings to repay U.S. government bailout funds. Excluding financial firms, the number of shares of S&P 500 companies rose 0.6 percent.
"Buybacks are simply a means of keeping dilution to a minimum," said Malcolm Polley, who oversees $1Â billion as chief investment officer at Stewart Capital Advisors in Indiana, Pa. "Most companies have tended to buy back their stock at any price."
While share repurchases demonstrate optimism among company executives, record amounts may signal overconfidence that might lead to declines in equities, according to Harris Private Bank's Jack Ablin.
Buybacks surged 36 percent to a record $589.1Â billion in 2007, S&P data show. The S&P 500 rallied to an all-time high of 1,565.15 in October 2007 before plunging 57 percent through March 2009.
"It's a good indicator of management confidence at the company level, but when you take a step back and you look from 30,000 feet and you see a bunch of buybacks, then it's more a sign of overconfidence," Ablin said. "The good news today is we're not at that extreme."