Companies buy gains by buying back their shares

The S & P 500 companies bought a record $ 189 billion of their own stock in the first quarter, and a similar, if not higher, number is expected for the second quarter, according to S & P Dow Jones Indices. In contrast, S & P 500 redemptions totaled no more than $ 137 billion in the six quarters preceding the tax revision.

Share buybacks improve profits by boosting earnings per share, a measure frequently used by investors to justify the stock price of a company. Redemptions reduce the number of shares of a company, distributing profits over a smaller number of shares. As a result, companies may report a higher percentage increase in earnings per share than the only earnings results can show.

Among the most aggressive companies in the stock buyback,

Apple
Inc.

AAPL -1.08%

repurchased 112.8 million shares during the quarter ended June, bringing 5 cents to 2.34 dollars per share.

Union Pacific
Corp.

UNP 0.60%

repurchased about 4% of its shares in the second quarter, which allowed earnings per share to grow significantly faster than net income. Through redemptions,

Southwest Airlines
Co.

Quarterly earnings per share increased even though their profits fell compared to the previous year.

For the S & P 500, earnings per share in the second quarter increased about 25% from a year ago, 2 points higher than net earnings, according to Thomson Reuters data. "It would be fair to assume that everything comes from buyouts," said David Aurelio, Senior Research Analyst at Thomson Reuters.

The increase in earnings per share helped investors pay more for their shares. The S & P 500 index is trading at record levels after gaining about 10% this year.

"Investors need to realize what they pay for," said Howard Silverblatt, Senior Index Analyst at S & P Dow Jones Indices.

In total, dozens of large companies bought back 4% or more of their outstanding shares in the 12 months ended June, according to data from S & P Dow Jones Indices. The resulting earnings gains may seem small in a quarter, but they are piling up: Apple's redemptions also added 8 cents per share in the March quarter, for example. And companies have also launched new major buyback programs, suggesting that earnings per share increases will continue.

Redemptions do not necessarily occur in order to increase earnings per share. Many companies say they want to return excess capital to shareholders. Others intend to offset new shares issued to employees.

Increases in earnings per share from stock buybacks are of low quality, which inflates earnings with no underlying substance, said Gregory Milano, managing director of Fortuna Advisors, a financial advisory firm that examined trends redemption. "It has less value."

Companies minimize the redemption effect. They say their earnings are strong, even without redemptions, and that while redemptions increase earnings per share, the effect is clear to investors and pinpointed by analysts' earnings estimates that drive stock prices.

Apple has emphasized its past claims that its earnings growth is accelerating and that tax reform "allows us to deploy our global cash flow more effectively", which leads to the creation of 20,000 US and US jobs. to invest $ 350 billion in the next five years. years.

Union Pacific repurchases contributed 9 cents to its earnings per share in the second quarter, which allowed the latter to rise by 37%, while net income increased by 29% over the previous year . Railway Chief Financial Officer Robert Knight said the redemptions "represent the return of excess cash to our shareholders and are consistent with the guidance we provided to the financial analyst community."

Southwest Airlines net income excluding items for the second quarter decreased by 2.1% compared to the same period last year. However, per share, it rose 2.4%, in part because the company bought back 28.3 million shares in the past year. Southwest said earnings per share growth was mainly due to the strong financial performance of our robust network.

As the business cycle continues, Milan said companies may find it harder to show earnings growth as they face increased shareholder pressure – and buyouts start to look more attractive. .

The repurchase effect adds to the profits already registered by the companies because the United States has reduced their corporate tax rate from 21% to 35%. Union Pacific's effective rate in the second quarter, for example, fell to 22.1% from 37.5% a year ago, before the tax reform. In some companies, tax cuts accounted for half or more of the declared profits.

Earnings from share buybacks can help compare a company's results to Wall Street forecasts.

In each of the last two quarters, large redemptions

Cisco Systems
Inc.

increased adjusted earnings per share by 2 cents. In each case, the overall results of the networking giant exceeded consensus analyst expectations of one cent.

Cisco said its buybacks are built into earnings per share forecasts provided to analysts. "This is not a question of quality of results, and it is inaccurate to say that we would have otherwise" missed "the PSE targets," said a representative of the company.

Experts say that when companies guide analysts on their buyout plans, the effect on estimates is imprecise. For example, redemptions made earlier in the quarter make a greater difference in earnings per share as these results are calculated using average shares outstanding. Businesses, however, generally do not plan the redemption schedule.

In the first quarter, just after the tax revision, 78% of S & P 500 companies reported earnings above analysts' expectations, according to FactSet. The second quarter then broke this record, with 80%.

Write to Michael Rapoport at [email protected] and Theo Francis at [email protected]