Investigate buybacks before investing in sectors and companies
“History’s best-ever bull market was built on sub-5% annual revenue growth, ~200bps of margin improvement and $4 trillion in stock buybacks funded by $4 trillion in new debt. Now that buybacks make sense, companies are limited by their debt”
“Stock buybacks expected to halve as companies bolster defences S&P 500 groups will purchase $371bn of their own shares this year, Goldman estimates”
“S. airlines want a $50 billion bailout. They spent $45 billion buying back their stock”
These are just some of headlines of the highly controversial buybacks. The companies that have been most active have recently underperformed YTD — while S&P 500 is down 16%, the S&P buyback Index is down 30%. An interesting insight is provided by Schroders that notes highly uneven distribution effects. Consider this before investing in those sectors and companies.
The fact is, as FT notes share buybacks have boomed since the financial crisis and reached a record $806bn in 2018, the first year of the corporate tax cuts ushered in by US president Donald Trump, helping to boost the stock market to record highs. Apple, the biggest spender in recent years, typically buys more than $10bn of its shares every quarter. While these headlines have attracted much attention Schroders notes that not only will buybacks slows down but may even be replaced by share issuance in some cases.
Interestingly some sectors naturally hit by Covid-19 have repurchased heavily, “the distribution of this effect has been highly uneven. In certain sectors and companies it has had a significant impact. In these cases, buyback suspensions could weigh heavily. Consumer discretionary and industrial stocks are most at risk.
On average, they have boosted their annual EPS growth by 4.5% and 3.7% a year, respectively. Ironically, these industries are also more likely to cut buybacks given their sensitivity to travel restrictions and plummeting consumer demand”
To supplement Schroders analysis, you will find below a table of the Top 100 most active companies in 2019. These companies alone have bought over $420bn in stocks!
Schroders also notes that “In contrast, buybacks have had little impact on more defensive areas of the market such as consumer staples and healthcare. They look less vulnerable from this perspective. On the other side of the scale, companies in a number of sectors have been net issuers of shares over the past five years so have received no boost from buybacks (the opposite, in fact)”. Tech looks also quite immune given the demand for e.g. Apple products despite heavy buybacks.
S&P Buyback Index — 100 largest companies repurchasing their own Equity — $ Total Value of Shares Repurchased in 2019
