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U.S. share buybacks decline in lockstep with S&P 500

Since reaching a record high on September 18th, the S&P 500 has fallen more than 6 percent, and new data suggests the slowing pace of corporate buybacks could be a contributing factor.

Thomson Reuters says approximately $1.7 billion US in stock repurchases occurred through mid-October during the heart of earnings season. That compares with $250 billion in buybacks during the first nine months of 2014.

“This quarter we expect that buybacks will have improved earnings growth by 1.5 percentage points,” Greg Harrison, senior research analyst at Thomson Reuters, tells BNN. “Without buybacks earnings growth would only be 5.8 percent, instead it’s expected to be 7.3 percent. So it is adding a fair amount and that’s been pretty consistent over the last two years.”

A Goldman Sachs note to clients suggested the waning buyback activity this month could be related to the blackout period before earnings are released, which would stop companies from conducting the tactical buybacks that have supported U.S. equity markets during selloffs in the recent past.

“That’s one way that companies have been dealing with these large cash piles that they’ve had,” Harrison said. “They haven’t been investing as much in capital expenditures, they’ve been more likely to buy back shares or increase dividends instead, which helps investors, but there’s concern that it could be at the expense of more long-term growth of the businesses.”

Data compiled by Bloomberg and S&P Dow Jones Indices shows S&P 500 companies have been plowing 95 percent of their profits into stock buybacks – and that stocks with the most repurchases gained more than 300 percent since March 2009.

“You can only go so far with financial engineering before you actually have to have a business with real growth," Chris Bouffard, chief investment officer at Mutual Fund Store, told Bloomberg. "Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”

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