NEW YORK - For an explanation why the U.S. stock market has risen so fast in a slow-growing economy, consider one of its star performers: DirecTV.

The satellite-TV provider has slashed expenses and expanded abroad, helping to lift its earnings per share dramatically over the last five years. However, the gains in its earnings per share have more to do with the company’s stock buyback program, which halved the number of its shares in circulation when the company bought them from investors.

Spreading earnings over fewer shares translates into higher earnings per share - a lot higher in DirecTV’s case. Instead of an 88 percent rise to $2.58, its earnings per share nearly quadrupled to $5.22.

Companies have been spending big on buybacks since the 1990s. What’s new is the way buybacks suggest through earnings-per-share figures that they are much better at generating profits than they actually are. Critics say the obsessive focus on buybacks has led companies to put off replacing plans and equipment, funding research and development, and generally doing the kind of spending needed to produce rising earnings-per-share figures for the long run.

David Rosenberg, former chief economist at Merrill Lynch, now at money manager Gluskin Sheff, calls buybacks a “sugar high.”

“It’s boosted the stock market and flattered earnings, but it’s very short-term,” Rosenberg said.

Over the past five years, 216 companies in the S&P 500 are also getting more of an earnings-per-share boost by slashing share counts than from running their underlying business, according to a study by consultancy Fortuna Advisors at the request of The Associated Press. The list of companies cuts across industries and includes retailers Gap and Kohl’s, railroad operator Norfolk Southern and drug distributor AmerisourceBergen.

The stock values of those four have more than tripled, on average, in the past five years.

Companies insist that their buybacks must be judged case by case.

“The vast majority of our shareholders are sophisticated investors who not only use [earnings per share] growth but other important measures to determine the success of our company,” says Darris Gringeri, a spokesman for DirecTV.

But Fortuna Chief Executive Officer Gregory Milano says buybacks are a waste of money for most companies.

“It’s game playing - a legitimate, legal form of manufacturing earnings growth,” says Milano, author of several studies on the impact of buybacks. “A lot of people [focus on] earnings-per-share growth, but they don’t adequately distinguish the quality of the earnings.”

So powerful is the impact, it has turned what would have been basically flat or falling earnings-per-share figures into a gain at some companies over five years. That list includes Lockheed Martin, the military contractor; Cintas, the country’s largest supplier of work uniforms; WellPoint, an insurer; and Dun and Bradstreet, a credit-rating firm.

It’s not clear that investors are worried, or even aware, how much buybacks are exaggerating the underlying strength of companies. On March 7, they pushed the Standard & Poor’s 500 stock index to a record close, up 178 percent from a 12-year low in 2009.

“How much credit should a company get earning from share buybacks rather than organic growth?” asks Brian Rauscher, chief portfolio strategist at Robert W. Baird & Co, an investment company. “I think the quality of earnings has been much lower than what the headlines suggest.”

Companies in the S&P 500 have earmarked $1 trillion for buybacks over the next several years. That’s on top of $1.7 trillion they spent on them in the previous five years.

It doesn’t seem that managements are trying to cover up a poor job of running their businesses. Even without factoring in a drop in share counts, earnings in the S&P 500 would have risen 80 percent since 2009.

And investors are pouring money into companies doing buybacks.

A fund that tracks companies which buy back shares the most, the PowerShares Buyback Achievers Portfolio, attracted $2.2 billion in new investments in the last 12 months. That is nine times what had been invested at the start of that period, according to Lipper, which provides data on funds.

For their part, the companies note that there are all sorts of reasons to like them besides their earnings-per-share figure.

WellPoint points out that it has increased its cash dividend three times since 2011, a big draw for people looking for income. Cintas says that it has timed its buybacks well, buying at a deep discount to stock price today. And DirecTV says investors judge it also by revenue and cash flow, both of which are up strongly.

What’s more, companies seem to genuinely believe that their shares are a bargain and they’d be remiss for not buying.

The last time buybacks were running high was 2007, right before stocks fell by more than half.

There are signs the next $1 trillion in buybacks for S&P 500 companies could prove ill-timed given that stocks aren’t looking as cheap anymore. After a surge of nearly 30 percent last year, the S&P 500 is trading at 25 times its 10-year average earnings, as calculated by Nobel Prize-winning economist Robert Shiller of Yale. That is much more expensive than the long-term average of 16.5.

Many investors assume shrinking shares automatically make remaining shares more valuable. A company that has $100 in earnings and 100 shares will report $1 in earnings per share. But eliminate half the shares and the same $100 is spread over 50 shares, and per share earnings double to $2.

But that doesn’t make the shares more valuable.

Shares aren’t just a claim on short-term earnings. They are an ownership stake in an entire company, including R&D programs and its capital stock - the plants, equipment and other assets needed to boost productivity long into the future. Critics say the lavish spending on buybacks has “crowded out” spending on such things, which is at its weakest in decades.

“It’s just like your car depreciating or your home depreciating - you have to invest,” says Gluskin Sheff’s Rosenberg, “The corporate sector [is] barely preventing the capital stock from becoming obsolete.”

One result: U.S. productivity, or output per hour, increased just 0.5 percent last year. It has grown by an average 2 percent a year since 1947.

In a 2010 study, Fortuna’s Milano found that stocks of companies that spent the most on buybacks vastly underperformed stocks of those that spent the least on them - at least over five years.

It’s unclear whether the kind of investor who dominates stock trading today cares about the long term, though. Buybacks are one of the few sure-fire ways to push a stock higher in the short term, and investors these days are very short-term.

They “don’t care what happens in three or five years,” said Rauscher, the Baird strategist. “The market has become less of an investor culture, more of a trading one.”

Business, Pages 71 on 03/16/2014