Buybacks underlie hot earnings

NEW YORK – The companies in the Standard & Poor’s 500 index have reported 16 straight quarters of double-digit earnings growth. If coming reports show that this spectacular growth continued in the second quarter, earnings per share may be pushed into double digits not because of stellar performance but thanks to share buybacks and higher interest rates.

Share buybacks have become a big-money endeavor. The cash-laden companies in the S&P 500 spent 45 percent of their capital expenditures on stock buybacks last year, which was especially significant because capital expenditures were on the upswing. Thanks to buybacks, the S&P 500 companies now hold 10 percent of their market value in company-owned stock, according to Howard Silverblatt, senior index analyst at S&P.

The shares don’t disappear when a company buys them back; they just sit in the company’s treasury. But when a company computes its earnings per share, those repurchased shares aren’t counted.

Within the S&P 500, earnings per share at 108 companies increased by at least 4 percentage points thanks to buybacks, according to S&P.

“Companies are buying back so much stock that you don’t even need a strong sales performance to get these double-digit EPS (earnings per share) any more,” David Rosenberg, of Merrill Lynch & Co., wrote in a recent note.