The upshot of all of this is that while share buybacks get much press, and often produce a bump in share prices when announced, investors in the U.S. equity market suffered a net dilution of 1.8 percent in 2014, or $454 billion. This net dilution, according to Research Affiliates, is about par for the course over the past 80 years, implying that the recent buyback binge is not having a shareholder-friendly effect.
There is evidence that investors are waking up to these facts.
Drug firm Johnson & Johnson announced a $10 billion buyback plan on Tuesday, just before it released earnings that beat street expectations. To be sure, J&J also said that a strong dollar was hampering earnings, but the reaction has been underwhelming, with its stock now trading more than 1 percent below where it was before the news.
Wal-Mart on Wednesday tried to sweeten a bitter pill, breaking news not just that it expects profits to fall 6 to 12 percent in its next fiscal year but also that it would pursue $20 billion of buybacks over two years. Not only did its stock fall 9.5 percent but Sterne Agee & Leach analyst Charles Grom told clients the buyback implies contracting margins and slow sales growth.
So now buybacks are a telltale sign of weakness, rather than in some way being an element of shareholder returns.
BofA Merrill Lynch, in its monthly Global Fund Manager Survey, has for a long time asked investors what they would like to see companies do with cash flow: return it to shareholders via buybacks and dividends; increase capital spending; or shore up their balance sheets. The percentage of those who want to see cash returned is low and falling, standing now at about 20 percent compared to a post-recession peak in 2010 of near 40 percent.
What managers want instead: a rising number of them favor improved balance sheets.
The spell it seems, has been broken and investors are looking closely not at the hand that is holding and waving a shiny object, but at the one companies are keeping behind their backs.