A man passes the New York Stock Exchange, Friday, June 24.The Associated Press
When it comes to share repurchases, it's the smallest stocks that are offering the most bang for the buck.
Since last summer, shares of small-cap companies doing the most buybacks have gained 4 per cent, compared with a 0.7-per-cent decline for their similarly repurchase-happy large-cap peers, according to data compiled by Barclays Plc. The group has also been dominant within the broader small-cap universe, beating the Russell 2000 Index by 3 percentage points over the period.
Barclays theorizes that smaller firms are getting stronger results because they're marshalling capital more efficiently than their large-cap brethren. When Russell 2000 companies lay out cash for repurchases it only represents about 32 per cent of their budget for capital expenses, on average. Companies in the Russell 1000, by contrast, spend about 81 per cent of that total to reduce share counts - double the median since 1989.
"If that ratio of repurchases-to-capex gets very distorted, which appears to be the case in large-caps, it's likely that buybacks won't continue to aid returns," Venu Krishna, head of equity-linked strategies at Barclays Plc, said by phone. "That applies to small-caps as well, but we're not there as of yet. They still have more time left and further to go."
The S&P 500 slipped 1 per-cent to 2,140.54 at 1:09 p.m. in New York, while the Russell 2000 fell 1.8 per cent.
The data is the latest entry in a debate about whether mega-cap companies are so obsessed with their stock prices that they're ignoring the future by blowing all their money on buybacks. In the comparison of large- and small-cap stocks, Barclays sees evidence the cupboard is going bare for S&P 500 Index companies whose more than $2.5-trillion of buyback outlays has underpinned a 220-per-cent advance in the index over 7 1/2 years.
This isn't to say buybacks are showing signs of slowing. While companies in the S&P 500 cut back on repurchases last quarter, the total announced in the last 12 months of $585 billion is up from a year earlier, according to S&P Dow Jones Indices data. First quarter buybacks of $161-billion were an all-time record, S&P said.
Another reason for the small-cap advantage in repurchases is companies are being more price-conscious about the shares they acquire. The median price-earnings ratio for the 50 small-cap companies that bought back the most shares over the last 12 months was 16.3, according to data compiled by Bloomberg. That's 12 per cent less than the same measure for the 50 companies that repurchased the least -- the majority of which bought no shares at all during the period.
"If companies feel their stocks are cheap, they tend to engage in buybacks," said Mr. Krishna. "And companies are motivated more by the relative cheapness of their stock compared to peers, rather than compared to their own history."