Why Buybacks Could Fuel Stocks Even Higher

Despite forecasts that corporate stock buybacks would slow this year, they are on track to set a new annual record in 2019, according to Howard Silverblatt, a widely followed analyst at S&P Global. Companies in the S&P 500 Index (SPX) spent a quarterly record of $233 billion in 4Q 2018 on repurchases, followed by a slower $205 billion in 1Q of this year. Despite this, buybacks are on track to blow away all records in 2019. “It’s an enormous amount,” observed Silverblatt in a detailed story in the Financial Times. “Companies still have the money, and institutional investors are still pushing them to buy back their stock.” 

Buybacks appear to be on track to set a new annual record in 2019, the FT says. Indeed, buyback announcements by U.S. corporations going into 2019 crossed the $1 trillion mark for the first time ever, Barron's reports, but cautions that this figure includes multi-year programs. However, if the pace of 1Q 2019 is maintained throughout the year, 2019 will surpass the annual record of $806.4 billion set in 2018, per Seeking Alpha.

The table below summarize the recent action in stock buybacks.

Significance For Investors

For companies that wish to return capital to shareholders, buybacks offer more flexibility than dividends. Once a dividend is raised, cutting it subsequently is bound to upset income-oriented investors. Moreover, a dividend cut usually is interpreted as a red flag, signaling a company in trouble. In contrast, reductions in buyback spending typically receive considerably less notice.

Big tech companies have been leaders in buyback activity, per a report in The Wall Street Journal. However, as these firms draw down cash balances repatriated from overseas, and some now spend more than their free cash flow (FCF) on buybacks, their outlays on shares repurchases are running into limits. Indeed, some companies, and not just tech firms, have taken on low-interest debt to fund buybacks. This practice is frowned upon by rating agencies, and tech giant Oracle Corp. (ORCL) was downgraded by Standard & Poor's (S&P) partly for this practice, the FT notes.

While the outlook for buyback spending among tech firms may be waning, it appears to remain strong among banks, Barron's reports. Citigroup Inc. (C) is particularly noteworthy in this regard. Citigroup recently reported EPS for 2Q 2019 that improved by 20% on a year-over-year (YOY) basis. A big part of the reason was that the bank's aggressive share repurchase program cut its share count by 10% in 2Q 2018, Barron's observes. As a result, banks flush with excess capital and eager to return it to shareholders may see buybacks as superior to dividend boosts, since buybacks also increase future reported EPS, all else equal.

Looking Ahead

The impetus for share repurchases remains strong. In fact, opposition to buybacks voiced by several leading members of the Democratic Party, particularly presidential candidates, actually may have the effect of stimulating yet more buybacks before any legislation curtailing the practice might be enacted.