Stocks are getting scarcer in the U.S. for the first time since the bull market began as companies cut share sales to the lowest level since 2006 and buy back equity at the fastest pace in four years.
Amgen Inc. (AMGN), Hewlett-Packard Co. (HPQ) and 1,971 other U.S. companies repurchased $397 billion of stock last year, while they issued $169 billion of new equity, data compiled by Birinyi Associates Inc. and Bloomberg show. The combination reduced the Standard & Poor’s 500 Index divisor, a measure of outstanding shares, by 0.6 percent last quarter, the first drop since March 2009.
Shrinking supply supports prices and shows valuations are so low that executives would rather buy back shares than spend the cash to expand, according to Columbia Management Investment Advisers LLC and USAA Investment Management Co. Bears say dwindling growth prospects will limit gains and deter investors who pulled money from stock funds for eight straight months through December, the longest stretch in at least two decades.
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“Having that equity base shrink and starting from a relatively pessimistic point usually sets up pretty well in the long term,” Laton Spahr, who helps oversee $325 billion as a money manager at Columbia Management, said in a Jan. 11 phone interview fromMinneapolis. “It gives you some hope that valuations have perhaps bottomed.”
The S&P 500 trades for 13.6 times earnings, down from 15.2 a year ago and 19 percent less than the average level since 1960, data compiled by Bloomberg show. The gauge declined 0.04 point last year, the smallest annual change since 1947, after surging 11 percent in the fourth quarter. The S&P 500 has gained 2.5 percent so far this year to 1,289.09 on Jan. 13. Futures on the gauge that expire in March advanced 0.5 percent at 3:36 p.m. in Tokyo today.
U.S. share sales fell 8 percent in 2011 as interest rates near record lows spurred companies to issue bonds instead. Corporate debt sales rose 3.2 percent to $800 billion, exceeding stock offerings by the widest margin since 2008, according to data compiled by Bloomberg.
Raising money through the bond market has gotten cheaper compared with selling shares, according to data compiled by Bloomberg. The 3.8 percent interest rate on Bank of America Corp.’s index of U.S. corporate debt compares with the 7.4 percent earnings yield on the S&P 500, the data show. Borrowing costs have been 0.5 percentage point lower than earnings yields on average during the past decade.
“Companies want to shrink the number of shares,” James Swanson, who helps oversee more than $200 billion as chief investment strategist at MFS Investment Management, said in a Jan. 11 interview in London. “It’s efficient balance-sheet management with bond yields where they are and share prices where they are.”
Corporate debt yields will probably stay low this year as the Federal Reserve keeps its target interest rate for overnight loans between banks near zero, according to Jan Loeys, the chief market strategist at New York-based JPMorgan Chase & Co.
While Menlo Park, California-based Facebook Inc., the biggest social-networking site, is exploring a $10 billion share sale, Bank of America and Deutsche Bank AG predict U.S. IPOs this year will stay near 2011 levels.
Record buybacks, mergers and acquisitions fueled the stock market’s advance from the end of 2004 through 2007. The S&P 500’s divisor, which changes as shares are added or removed from index companies, fell almost 6 percent in the period as the S&P 500’s price rose 21 percent.
The divisor increased about 5.3 percent from its 2009 low to last year’s peak in July as the S&P 500 jumped 56 percent. U.S. share sales in 2009 exceeded repurchases by about $80 billion, data compiled by Birinyi Associates and Bloomberg show.
The increase in buybacks last year suggests companies have fewer opportunities to invest in projects that will generate profit growth, said Russ Koesterich, the San Francisco-based global chief investment strategist at the iShares unit of BlackRock Inc., which manages about $3.3 trillion.
The International Monetary Fund will probably cut its forecast for global economic growth asEurope’s debt crisis persists, Christine Lagarde, the Washington-based fund’s managing director, said this month. S&P 500 companies relied on foreign sales for about 46 percent of total revenue in the past year, according to Howard Silverblatt, the senior index analyst at S&P inNew York.