Record Stock Buybacks Will Fire Up the Bull Market

The leading buyers of U.S. stocks during the course of the long bull market have been corporations themselves, through their share repurchase programs, also known as stock buybacks. Share prices should be boosted by record spending of $800 billion on buybacks in 2018, up by 52% from $525 billion in 2017, per estimates by JPMorgan, as reported by The Financial Times.

"We are expecting record buyback announcements during this earnings season given further clarity on tax reform, equity multiples are broadly attractive, and companies [are] likely to replenish buyback programs after the recent sell-off," according to Dubravko Lakos-Bujas, an equity analyst at JPMorgan, as quoted by the FT. (For more, see also: 5 Stocks to Outperform in 2018's Volatile Market.)

Big Money Stays Bullish

Meanwhile, professional money managers remain bullish, though less so than in the fall, according to Barron's Big Money Poll. The percentage of respondents who expect stock prices to be up in 2018 has fallen from 61% to 55%. The average closing value that they predict for the S&P 500 Index (SPX) in 2018 is 2,875, up 7.5% for the year, 7.1% above the April 16 close, and marginally over the current all-time record close of 2.872.87 on January 26.

Big Spenders

Among those corporations announcing large stock buybacks are these five, according to Forbes: Cisco Systems Inc. (CSCO), $25 billion; Boeing Co. (BA), $14 billion; Merck & Co. Inc. (MRK) and Oracle Corp. (ORCL), $10 billion each; and MasterCard Inc. (MA), $4 billion. Meanwhile, CNBC reports, Broadcom Inc. (AVGO) has announced a $12 billion share repurchase program extending through its 2019 fiscal year.

Analyst Jim Suva of Citigroup, per CNBC, anticipates that Apple Inc. (AAPL) will more than double its annual outlays on buybacks, which averaged $32 billion in recent years. Suva also expects Apple to hike its dividend, with the total impact being an increase of about $100 billion in its returns of capital to shareholders during 2018.

The Case for Buybacks

"We recommend investors continue to seek companies that run a more efficient capital structure with a consistent track record of returning capital to shareholders over companies with bloated cash balances," as Lakos-Bujas of JPMorgan wrote earlier this year, as quoted by MarketWatch. His reasoning, as summarized by MarketWatch, was that "it is difficult to consistently reinvest retained earnings at attractive rates."

Since 2000, stocks with higher buyback yields (i.e., spending on buybacks divided by market capitalization) outperformed their rivals by 150 basis points (bp) during market corrections and by 200 bp during recessions, per research by JPMorgan cited by MarketWatch. This has led JPMorgan to create a Long Buyback basket of 50 recommended stocks based on these five criteria, per MarketWatch: cash held overseas; projected net income growth over the next two years; buyback yield over the past 12 months; projected buyback yield over the next 12 months; and a market cap of at least $20 billion. Apple, Cisco and Boeing are among the companies on this list.