U.S. companies are buying back huge amounts of their own stock, and the ones executing the biggest buybacks are seeing their share prices rewarded handsomely.
Companies in the Standard & Poor's 500 Index purchased $128.2 billion of their own stock in the third quarter, according to S&P Dow Jones Indices,
The Wall Street Journal reports. That represents the highest level since the fourth quarter of 2007.
As for stock performance, the S&P 500 Buyback Index, which includes the 100 stocks with the highest buyback ratios, has soared 45 percent so far this year, outperforming the S&P 500's 28 percent gain.
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The buyback ratio consists of the total cash paid for common stock during the past year divided by the market capitalization of the common stock.
To be sure, not all investors view the buybacks as positive. Cash devoted to buybacks is cash that isn't devoted to research, development and other corporate operations.
"It's not just the money," going to buybacks, William Lazonick, director of the Center for Industrial Competitiveness at the University of Massachusetts at Lowell, tells
The Washington Post.
"It changes the strategy of the company. It undermines innovation."
"Corporate profits are very high, but corporations are not expecting a huge burst of growth," Ben Inker, co-head of asset allocation at investment-management firm GMO, tell The Post. "Given that they're not expecting a lot of growth, there isn't a lot of reason to invest. So they're finding ways of getting money back to shareholders."
In addition, with stocks trading at record highs, companies are buying back shares at lofty price levels.
Burt White, chief investment officer at LPL Financial, told The Journal that the rate of buybacks will likely decelerate in 2014 as a result.
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