Why Stock Buybacks Are Reaching Near-Record Levels Amid Trade Tensions
Explore the surge in stock buybacks by major U.S. corporations in 2019, driven by strong corporate confidence despite trade war uncertainties, and understand their impact on the market.
Throughout the ongoing bull market, corporate share repurchases have been a dominant force driving demand for U.S. equities, significantly supporting stock prices. In 2019, stock buybacks continue at an almost unprecedented pace, signaling corporate America's sustained confidence in both the bull market and the broader U.S. economy.
Ed Clissold, chief U.S. strategist at Ned Davis Research Group, noted to The Wall Street Journal, "Companies strive to avoid cutting or suspending dividends; therefore, if economic prospects worsen, buybacks are typically the first expense they reduce."
With over 80% of S&P 500 companies having reported their first-quarter 2019 earnings, total share repurchases have reached $180 billion, according to S&P Dow Jones Indices data cited by the Journal. This pace positions Q1 2019 as potentially the second-largest quarter for buybacks since 1998.
The record quarterly buyback stands at $223 billion in Q4 2018, a period when the S&P 500 declined by 14%. The five sectors leading buybacks during that quarter accounted for 84% of the total S&P 500 repurchases:
Top 5 Sectors by Buyback Volume During Q4 2018 Market Decline
- Information Technology: $61.3 Billion
- Financials: $45.6 Billion
- Health Care: $31.3 Billion
- Consumer Discretionary: $25.7 Billion
- Industrials: $23.0 Billion
- Total S&P 500 Buybacks: $223.0 Billion
Source: S&P Dow Jones Indices
Investor Implications
Fueled largely by the corporate tax cuts enacted in December 2017, S&P 500 companies set a record for buybacks in 2018, spending $806.4 billion—a 55.3% increase from 2017 and 36.9% above the previous record set in 2007. The buyback activity was widespread, with 444 companies (88.8%) repurchasing shares in 2018, up from 424 (84.8%) in 2017.
Although the S&P 500 index dropped 14% in Q4 2018, the average stock fell by just 5.3%, indicating that declines were concentrated among the largest companies. This broad price drop allowed buybacks to remove more shares from the market with less capital, thereby enhancing earnings per share (EPS).
Estimates from S&P Dow Jones Indices suggest that 25% of S&P 500 companies boosted their EPS by at least 4% in Q1 2019 due to buybacks. Ned Davis Research analysts further estimate that without share repurchases, the S&P 500 would have been approximately 19% lower at the end of Q1 2019.
Alternative Perspectives
Challenging the conventional belief that buybacks increase EPS by lowering share counts, economist Ed Yardeni of Yardeni Research highlights in his blog that data from S&P shows only a slight divergence between aggregate and per-share operating income growth since 1994. Furthermore, Yardeni finds that buybacks contributed no more than a 2.6% increase in the S&P 500’s value from 2008 through 2017, averaging less than 0.3% annually.
Yardeni attributes this to companies primarily repurchasing shares to offset dilution from stock-based compensation given to executives and employees over time, rather than to boost EPS directly.
Leading companies in buyback activity in early 2019 include Apple (AAPL), Merck (MRK), Oracle (ORCL), and Microsoft (MSFT).
Looking Forward
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told the Journal, "Expectations for 2020 are optimistic regarding buybacks, assuming the economy remains robust and trade tensions ease. Although earnings and cash flow projections are strong for next year, current conditions have yet to fully align with these forecasts."
Meanwhile, stock buybacks have become a contentious political issue, with some Democratic leaders and presidential candidates proposing restrictions or bans framed in populist terms. Notable buyback supporters include CEOs Warren Buffett and Jamie Dimon, who have historically backed Democratic candidates. Yardeni also provided a strong counterargument in his blog.
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