Trillions of dollars have been spent on stock buybacks in recent years, with share repurchases expected to jump 13% in 2019 alone to reach a whopping $940 billion. Despite the massive boom in spending, companies that have invested heavily in buybacks, as well as those that have upped investments in capex and dividends, have significantly lagged the broader S&P 500 Index in the recent period. According to analysts at Goldman Sachs, a basket of buyback stocks has increased at only half the broader S&P 500’s pace over the past 12 months.

Buyback Stocks Badly Lag the S&P 500

(12-month performance)

  • Buyback stocks; 7%
  • Buyback and dividend stocks; 8%
  • Capital spending and R&D stocks; 8%
  • Dividend stocks: 10%
  • S&P 500 index; 13%

Source: Goldman Sachs

U.S. corporations increased their total cash spending by 25% in 2018 to reach $2.8 trillion. Yet companies that invested heavily in buybacks saw their shares rise just 7%, versus a 13% gain for the S&P 500, per Goldman’s U.S. Weekly Kickstart Report dated April 26, 2019.

This underperformance makes these companies highly vulnerable to criticism about buybacks from politicians in Washington. While Goldman expects strong buybacks to continue through 2019, with $191 billion authorized so far this year, analysts note that the current political debate around share repurchases increases uncertainty around their buyback forecast. If buybacks are ultimately prohibited, companies would likely up dividends and increase cash M&A spending or reduce debt outstanding, wrote Goldman.

The stock performance results were similarly bad for other kinds of investments. Companies that prioritized spending on capex and R&D rose only 8%, those that focused on a combination of buybacks and dividends increased 8%, and stocks which boosted dividends heavily rose 10%, again well behind the S&P 500.

"Recent market performance indicates a clear investor preference for safe, high quality balance sheets rather than firms investing for growth, returning cash to shareholders, or paying down debt," wrote Goldman. "Our sector-neutral Strong Balance Sheet basket (GSTHSBAL) has outperformed a similar basket of weak balance sheet stocks (GSTHWBAL) by 15 pp since the start of 2018 (19% vs. 4%)."

Looking Ahead

Investors disappointed with the minimal rewards reaped from companies increasing most forms of cash spending over the past 12 months should consider stocks of “safer” companies with high quality balance sheets, rather than firms investing for growth, returning cash to shareholders, or paying down debt, writes Goldman. These stocks are part of Goldman’s new Debt Reducers and Debt Issuers baskets, based on debt paydown and issuance, and include companies such as Nvidia Corp. (NVDA), Chipotle Mexican Grill Inc. (CMG), Netflix Inc. (NFLX), Illumina Inc. (ILMN), and TJX Companies Inc. (TJX). These stocks have blazed past the S&P 500 and are positioned to sustain their momentum, per the analysts.

“Firms with safe, high quality balance sheets have outperformed and now trade at an 83% P/E multiple premium to weak balance sheet firms,” read the Goldman report.