U.S. Firms Buy Back Stock at a Record-Setting Pace

U.S. companies are conducting the most intensive share-repurchasing effort in the market’s history.

This year, more than 300 companies have announced plans to buy back a total of $40 billion worth of stock. In the first two weeks of March alone, a list of companies that includes Monsanto Co., Sears, Roebuck & Co., Bristol-Meyers Squibb Co. and BankAmerica Corp. announced plans to repurchase a total of more than $9 billion of publicly held stock.

If this trend continues, companies will retrieve more than $160 billion of publicly held stock in 1996, shattering the record of $98.8 billion set last year.

Buybacks are typically intended to prop up a languishing stock both by signaling management’s confidence in a company’s future and by reducing the pool of stock available to the public.

But the buybacks announced this year come even as stock prices have been rising in an ongoing bull market. These moves also come when corporate America is more profitable than ever. And because corporations haven’t been passing their profits directly to shareholders in dividends, they have ready access to a deep pool of capital.

One engine in the market’s recent rise has been record-setting inflows to mutual funds, which have pushed up demand for stocks. Companies’ buybacks, in turn, have helped perpetuate the high prices by shrinking the supply of stocks.

In the long run, investors benefit from the gains in the prices of their holdings. But some analysts said they are worried about a related trend: the decline in dividend yield.

“The bull market for U.S. stocks has derived its vigor from both lower bond yields and surprisingly strong earnings growth,” Thomas McManus, a market strategist at Morgan Stanley & Co., said in a report earlier this year. “But dividend growth hasn’t nearly kept up.”

Last year, the number of companies that raised their dividends rose just 4%. Companies in the S&P; 500 paid just 37% of their after-tax profit to shareholders, near a historical low.