Business

Companies using buybacks to boost earnings reports

Profits for companies in the S&P 500 Index are expected to grow an average of 4.9 percent in the second quarter — their lowest advance in a year and far below the 15 percent and 16 percent jumps in the last two quarters.

At the same time, those same companies are expected to boost their stock buybacks by an astounding 24 percent, to $160 billion, according to the latest S&P Dow Jones data. That’s up 60 percent from a year ago.

The result is companies reporting earnings per share that smell a lot better than the actual performance of their bottom lines — news that has, perhaps, attracted investment dollars to those stocks.

In the first quarter of 2014, the buybacks boosted the EPS for these companies by 24 percent, according to S&P estimates — a lot better than the 15 percent average increase for profits.

“It’s a legitimate use of money to enhance earnings per share,” says Howard Silverblatt, S&P Dow Jones senior index analyst, who monitors companies that reduce their outstanding shares by 4 percent or more in a single year. “Companies that do it correctly get a significant tailwind.”

To be sure, this income statement financial engineering has been going on for several years but it picked up steam in the second quarter. While Main Street investors may have been willing to overlook these moves until recently — the S&P 500 was up 6.1 percent in the first six months of 2014 — the first monthly decline in the index in July can serve as a wake-up to the actual health of companies.

S&P 500 companies have allocated twice the cash to buybacks than to dividends in the first quarter, statistics show. There were $82 billion in dividends paid in the three months ended March 31.

Indeed, of the $3.70 gain in S&P 500 operating EPS between the third quarter of 2011 and the first quarter of 2013, less than half, or just $1.50, was attributable to organic growth, according to a study by JP Morgan. The remaining $2.20 — or 60 percent of the EPS gain — was the result of buybacks.

The poster child for growth through buybacks is, of course, Apple. The company, motivated in part by activist investors attracted to its $13 billion cash cushion, has been returning capital to shareholders through dividends and buybacks at an unprecedented rate.

In its most recent quarter, for example, Apple had 6.5 percent fewer outstanding shares than it did a year ago.

This reduction, in turn, turned a good operating performance into a greater financial one. That is, while net earnings increased an admirable 12.3 percent, EPS shot up an even more admirable 19.6 percent.

Still, for curiosity value, nothing comes close to Laboratory Corp. of America.

The medical lab-testing company posted a net-earnings decline of 7.0 percent for its second quarter. However, thanks to stock buybacks, it reported an EPS increase of 1.2 percent.

Sirius XM is also benefiting from $6 billion in buybacks over the last 19 months.

In its second-quarter report, the satellite-radio giant met analyst estimates of profits of 2 cents per share. Getting there, however, required that it spend $1.5 billion to buy back 6 percent of its outstanding shares.