Many companies that have bought back more than 25% of their shares since 2010 have posted massive stock gains longterm, including Apple Inc. (AAPL), Travelers Companies Inc. (TRV), Home Depot Inc. (HD), Northrop Grumman Corp. (NOC) and Autozone Inc. (AZO). This is happening despite increasing criticism from critics, including in Washington, that buybacks are a misallocation of assets.
In 2019, companies are boosting buybacks at a $1.140 billion annual rate, up from more than $900 million last year, per a detailed column in CNBC on 'Buyback Monsters,' which are companies that have bought back unusually large amounts of their shares. Since 2010, for example, Apple's stock has risen more then six-fold as it reduced its shares by 26% while Travelers stock has more than tripled as it lowered shares outstanding by 51%. And Northrop Grumman's stock soared more than six-fold as it cut shares outstanding by 45%. The percent gains in performance were estimated by Investopedia.
5 'Buyback Monsters' Crushing The Market
(% gain since January 2010) (% stock bought back since 2010)
- Apple; 550%, 26%,
- Travelers; 232%, 51%
- Home Depot; 690%, 35%
- Northrop Grumman; 526%, 45%
- Autozone; 477%, 48%
Source: CNBC, Investopedia
Shares Outstanding at 20-Year Low
U.S. corporations have already announced $190 billion in buybacks this year, per The New York Times. Since 2009, S&P 500 companies have returned nearly $5 trillion to shareholders through buybacks, accounting for roughly 2% of their annual earnings growth, per JPMorgan, as outlined by Barron’s.
This trend has driven the number of shares outstanding to a 20-year low, and has spurred some politicians in Washington to propose restrictions on the ability of corporations to repurchase their shares. Critics say any reduction in share count means that earnings appear that much better, without any real changes in company fundamentals, according to a CNBC.
Home Depot's Buyback Spree
Home Depot, though, may be an example of how these buybacks can benefit investors. The company's stock has soared nearly 8-fold since 2010, during which it bought back 35 percent of its shares. Now, Home Depot is the latest blue chip company that has announced major buy backs this year. As the company announced weaker-than-expected guidance in its quarterly financial report this week, it also told investors it planned to purchase $15 billion of Home Depot stock. The latest move would further reduce shares outstanding by another 7% if executed and not diluted with stock options, per CNBC.
Market watchers expect massive buybacks to continue following the near $1 trillion announced last year on the back of President Trump’s sweeping corporate tax cuts. JPMorgan strategist Dubravko Lakos-Bujas is one of them, highlighting the $1 trillion in cash U.S. corporations still hold overseas, as well as the fact that the U.S. equity market is now much cheaper, per Barron’s. He expects S&P 500 companies to announce another $800 billion of repurchases in 2019.
Despite these stocks' outperformance since 2010, they are likely to receive rising criticism as their share gains slow in the short term in 2019. The debate will continue whether the trillions spent on buybacks is a better use of funds than avenues like giving employees raises, and investing in new equipment and research.