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March 11, 2014

How investors may be getting fooled by buybacks

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NEW YORK —

The stocks of those four have more than tripled, on average, in the past five years.

Companies insist that their buybacks must be judged case by case.

"The vast majority of our shareholders are sophisticated investors who not only use EPS growth but other important measures to determine the success of our company," says Darris Gringeri, a spokesman for DirecTV.

But Fortuna CEO Gregory Milano says buybacks are a waste of money for most companies.

"It's game playing — a legitimate, legal form of manufacturing earnings growth," says Milano, author of several studies on the impact of buybacks. "A lot of people (focus on) earnings per share growth, but they don't adequately distinguish the quality of the earnings."

So powerful is the impact, it has turned what would have been basically flat or falling EPS into a gain at some companies over five years. That list includes Lockheed Martin, the military contractor, Cintas, the country's largest supplier of work uniforms, WellPoint, an insurer, and Dun and Bradstreet, a credit-rating firm.

It's not clear investors are worried, or even aware, how much buybacks are exaggerating the underlying strength of companies. On Friday, they pushed the Standard and Poor's 500 stock index to a record close, up 178 percent from a 12-year low in 2009.

"How much credit should a company get earning from share buybacks rather than organic growth?" asks Brian Rauscher, chief portfolio strategist at Robert W. Baird & Co, an investment company. "I think the quality of earnings has been much lower than what the headlines suggest."

And it could get worse.

Companies in the S&P 500 have earmarked $1 trillion for buybacks over the next several years. That's on top of $1.7 trillion they spent on them in the previous five years. The figure is staggering. It is enough money to cut a check worth $5,345 for every man, women and child in the country.

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