By William L. Watts, MarketWatch

NEW YORK (MarketWatch) -- Stock buybacks have been a popular way for companies to return cash to shareholders, but the practice may soon fall out of style.

Buybacks rose to $129.4 billion in the fourth-quarter of 2013, according to S&P Dow Jones Indices, a 1% rise from the previous quarter, while full-year 2013 buybacks among S&P 500 companies rose 19.2% to $475.6 billion. The high-water mark was achieved in 2007, when companies spent $589.1 billion, according to the data firm.

First-quarter data hasn't been finalized yet, but it looks like buybacks continued at a heavy pace in the first three months of the year, analysts say. Corporations, meanwhile, have been the biggest buyers of stocks over the course of the record-setting bull rally.

Increased buybacks are a rational response in an environment where economic growth has long been stalled, with little impetus from either government or consumer spending, said Joe Costigan, director of equity research at Pennsylvania-based Bryn Mawr Trust, which has $7.4 billion in total assets.

In such a low-growth environment, the last thing a company wants to do is create additional capacity.

"Corporations are confronted by this and there are two things that they know: If they buy assets outside of their industry, they're probably not going to get the returns they need to justify their purchase. If they buy their own assets back via share repurchases, it's more of a known quantity," he said in a phone interview.

Steven Ricchiuto, chief economist at Mizuho Securities, argued in a note earlier this month that return expectations have moved "out of alignment with reality."

Corporate managers are seeking out investments that meet their "double-digit hurdle rate" while investors are also seeking out above-market returns.

"This mismatch has dampened corporate investment spending, and with limited top-line revenue growth, companies have remained focused on cost cutting, share buybacks and dividend increases to maximize shareholder value," he wrote. At the same time, companies face pressure from activist shareholders demanding higher returns even though market rates have plummeted as the inflation rate has slowed.

Diminishing rewards

Some stock watchers question whether the buyback trend is likely to continue at a rapid pace.

Investors have been less willing to reward buybacks recently. The S&P 500 Buyback Index, which tracks the 100 stocks with the highest buyback ratios, has a year-to-date return of 4.6%, lagging a 5.4% return for the S&P 500 (SPX).

The buyback index returned more than 40% in 2013, according to The Wall Street Journal, versus the S&P 500's 30% return.

Skeptics contend that the weaker outperformance indicates buybacks are starting to lose their punch.

John Higgins, market economist at Capital Economics in London, is one of those skeptics. He has laid out theoretical reasons why debt-financed buybacks shouldn't provide much of a boost to share prices even allowing for the tax deductibility of interest expenses.

In a 2011 note, Higgins said the additional riskiness "brought about by a share buyback should result in an increase in investors' required return on equity that -- tax effects aside -- offsets the company's increased return on equity."

More recently, he warned: "The U.S. stock market may lose an important prop."

There's also the risk of overpaying. Buybacks peaked in 2007 just before the market collapsed.

In the end, a return to sustainable growth and higher yields will likely start to slow buybacks, Costigan said. Rational boards will stop buying back shares when they can use capital in more productive ways, whether that's buying other company's shares, improving the productivity of their own asset base or paying a dividend, he said.

Week ahead: Fed meeting

This week's economic calendar is dominated by the Federal Reserve meeting that concludes Wednesday and is followed by a news conference by Fed Chairwoman Janet Yellen.

While Bank of England Gov. Mark Carney last week got investors' attention by warning that U.K. interest rates may start to rise sooner than market participants have penciled in, economists at RBC Capital Economics expect the Fed to remain focused on soothing concerns over the timing of the Fed's first rate hike.

Investors will undoubtedly keep an eye on developments in Iraq after Sunni militias swept through northern cities and set their sights on Baghdad, putting pressure on U.S. President Barack Obama to authorize military intervention to aid Iraq's government. So far, Iraq's southern oilfields are seen as safe, but the potential for any disruptions could send oil prices spiking further, analysts said. See: 5 things you need to know about Iraq.

On the corporate front, earnings are due from software maker Adobe Systems Inc. (ADBE) on Tuesday, while package-delivery firm FedEx Corp. (FDX) is due to report on Wednesday. BlackBerry Ltd. (RIMM) and Oracle Corp. (ORCL) are slated to report Thursday.

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