Is Corporate America's Buyback Binge Nearing Its End?

Buybacks by US companies have been in the news for all the wrong reasons lately.

The aggressive share repurchase spree over the recent years has led to criticism that US companies are unable, or unwilling, to invest funds for future growth in their own businesses. Worse, many of these companies, which have stashed billions abroad in their efforts to avoid US taxes, are borrowing to implement their repurchases, notwithstanding that their cash flows may be unequal to the task of servicing this debt.

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Benefits of buyback programs on a manager’s compensation program

Increasingly there are murmurs of managers embarking on buyback programs with one eye on the beneficial impact of the repurchases on their own compensation programs. As executive appointment terms get shorter, corporate governance gets the back seat because managers find it easier to boost earnings per share by draining the company treasury than by business development - they are well aware that they are unlikely to be around when the chickens of under-investment come home to roost.

Not surprisingly, there is a decided decline in the trend of insider buying, indicating that managers are implementing corporate buybacks even though they themselves are really not so gung-ho about their company's fortunes.

However, the latest Buyback Quarterly from Factset says Q2 of 2014 was notable for the fall in buybacks by companies. Could the tide be turning?

 Buyback trend

The largest companies held off repurchases in Q2

"Dollar-value share repurchases amounted to $123.7 billion over the second quarter and $539.3 billion for the trailing twelve months," says Factset research analyst Michael Amenta in the Buyback Quarterly of September 17. "Quarterly buybacks declined year-over-year -1.1% for the first time since Q3 2012; and, due to record post-recession activity last quarter, Q2 showed the most severe quarter-over-quarter decline -22.9% since Q4 2011."

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