Over the course of the current bull market, corporate share repurchases have been the leading source of demand for U.S. equities, adding a key propellant to share prices. In what may be interpreted as a sign of corporate America's continued faith in that bull market and the U.S. economy, share repurchases, also called stock buybacks, have been proceeding at a near-record pace in 2019.
“Companies will do a lot to avoid cutting or suspending a dividend, so if prospects deteriorate, buybacks are the first thing they take away," as Ed Clissold, chief U.S. strategist at Ned Davis Research Group, told the The Wall Street Journal.
With more than 80% of the companies in the S&P 500 Index (SPX) having reported 1Q 2019 results, their aggregate share repurchases have reached $180 billion, per data from S&P Dow Jones Indices, as reported by the Journal. At this clip, 1Q 2019 may end up being the second-biggest quarter ever, based on data since 1998, in terms of spending on buybacks, according to these sources.
The current quarterly record is $223 billion in 4Q 2018, during which period the S&P 500 retreated by 14.0%. The table below lists the five sectors in which the
buyback action was most brisk during that quarter, collectively accounting for
84% of the S&P 500 total.
Significance for Investors
Spurred in large part by the corporate tax cuts enacted in Dec. 2017, share repurchases by S&P 500 companies set a full year record of $806.4 billion in 2018, up by 55.3% from 2017, and 36.9% greater than the previous record of $589.7 billion set in 2007, per S&P Dow Jones Indices. Spending on buybacks was broad-based, with 444 (88.8%) of S&P 500 companies repurchasing shares in 2018, up from 424 (84.8%) in 2017.
While the capitalization-weighted S&P 500 declined by 14.0% in 4Q 2018, the average stock in the index fell by 5.3%, per S&P Dow Jones Indices. That is, bigger drops by the biggest constituents had outsized impacts. As a result of the broad decline in stock prices in 4Q 2018, buybacks pulled more shares off the market for a smaller outlay of capital, thus giving a stronger boost to EPS in the process.
S&P Dow Jones Indices estimates that 25% of the S&P 500 companies increased their EPS by at least 4% in 1Q 2019 as the result of buybacks. Analysts at Ned Davis Research, meanwhile, estimate that the value of the S&P 500 Index would have been 19% lower at the end of 1Q 2019, if companies had not repurchased any shares, per the Journal, though the article did not specify the period over which these buybacks occurred.
"The widely believed notion that buybacks boost earnings per share by reducing the share count isn’t supported by the data S&P provides for the S&P 500 companies," counters economist Ed Yardeni, founder of Yardeni Research, in his blog.
Based on this data, Yardeni makes two interesting findings. First, the growth rates of S&P 500 operating income on both an aggregate and a per share basis have diverged only marginally since the data series began in 4Q 1994. Second, buybacks increased the value of the index by no more than 2.6%, or less than 0.3% annually, from the start of 2008 through the end of 2017.
"The best explanation for this surprising development is that the S&P 500 companies are mostly buying back their shares to offset the dilution of their shares resulting from compensation paid in the form of stocks that vest over time, not just for top executives but also for many other employees," Yardeni concludes.
“The presumption is that 2020 will be a good year for buybacks, but that’s based on expectations that the economy remains strong and we don’t have a trade war. Even though next year is supposed to be a great year for earnings and cash flow, we’re not there yet," observed Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, in remarks quoted by the Journal.
Meanwhile, various prominent Democratic Party figures, among them presidential candidates, have turned buybacks into a political football, advocating restrictions or bans couched in populist rhetoric. Defenders of buybacks include CEOs Warren Buffett and Jamie Dimon, both of whom have generally supported Democratic candidates in the the past. Yardeni also offered a vigorous riposte in his blog.