Meridian Star

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March 11, 2014

How investors may be getting fooled by buybacks

(Continued)

NEW YORK —

There is nothing necessarily nefarious or wrong about buybacks per se. It doesn't seem that managements are trying to cover up a poor job of running their businesses. Even without factoring in a drop in share counts, earnings in the S&P 500 would have risen 80 percent since 2009.

The problem is that many investors are pouring money willy-nilly into companies doing buybacks as if they are always a good thing, and at every company.

A fund that tracks companies cutting shares the most, the PowerShares Buyback Achievers Portfolio, attracted $2.2 billion in new investments in the last 12 months. That is nine times what had been invested at the start of that period, according Lipper, which provides data on funds.

For their part, the companies note there are all sorts of reasons to like them besides EPS.

WellPoint points out that it has increased its cash dividend three times since 2011, a big draw for people looking for income. Cintas says that it's timed its buybacks well, buying at a deep discount to stock price today. And DirecTV says investors judge it also by revenue and cash flow, both of which are up strongly.

What's more, companies seem to genuinely believe their shares are a bargain and they'd be remiss for not buying, though their record of choosing the right time is poor.

The last time buybacks were running so high was 2007, right before stocks fell by more than half.

There are signs the next $1 trillion in buybacks for S&P 500 companies could also prove ill-timed. Stocks aren't looking so cheap anymore. After a surge of nearly 30 percent last year, the S&P 500 is trading at 25 times its 10-year average earnings, as calculated by Nobel Prize winning economist Robert Shiller of Yale. That is much more expensive than the long-term average of 16.5.

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