U.S. companies have remained stalwart buyers of their own shares even as institutional and individual investors alike have become skittish and trimmed their exposure to equities.
Companies in the Russell 3000 have unveiled plans to buy back more than $600 billion in shares this year, in line with last year’s record pace, according to data from research firm Birinyi Associates. In all, they announced $1.27 trillion of share repurchases and completed $1.05 trillion in buybacks in 2022, both all-time highs, according to Birinyi.
That activity has offered an important source of support for the stock market. Data on fund flows show many of the traditional buyers of stocks have been net sellers of late. Some have moved into less risky investments like money-market funds amid concerns that the economy is on the brink of a recession.
The S&P 500 has risen 8% in 2023 on hopes the Federal Reserve has completed its bid to curb inflation by rapidly raising interest rates. Yet the recent crisis of confidence in the banking sector suggests higher rates are taking a toll on the economy, while worries about the debt ceiling are adding to the uncertainty facing investors.
A handful of the biggest companies are responsible for a disproportionate share of total buybacks.
were the biggest buyers of their own shares in the first quarter, according to S&P Dow Jones Indices Data. Apple led the way, spending $19.1 billion during the period.
Those and other megacap technology stocks are powering the broader market’s gains again as well. Meta shares have more than doubled in 2023; shares of the other three companies have risen at least 30%.
“Buybacks are running at a historically high pace,” said Winston Chua, an analyst with research firm EPFR. “That’s certainly bullish for the stock prices of the companies doing them.”
When a company buys back its own stock, the increased demand can boost its share price. By retiring the shares they repurchase, companies lower the count of shares outstanding and raise their per-share earnings, a closely watched profitability metric. Buybacks don’t accrue additional taxes for taxable investors until they sell shares and realize capital gains, unlike with dividend payouts, which are taxed as income.
Client-flow data from Bank of America’s equities trading desk underscore the outsize demand from companies compared with other investors this year. Although the bank’s clients have purchased a net $8.5 billion of equities this year in aggregate through mid-May, they actually sold $25.3 billion excluding their buyback activity.
“Corporate client buybacks as a percentage of S&P 500 market cap remain above 2022 highs at this time,” Bank of America analysts wrote in a May 16 report.
Share repurchases have long faced criticism in Washington and elsewhere from those who argue companies should invest in their growth instead of boosting shareholders.
Buybacks have been subject to a 1% tax since Jan. 1, which President Biden proposed quadrupling to 4% during his State of the Union address in February. The new tax appears to be doing little to discourage the practice thus far.
“I have not seen any evidence that the tax has changed things,” said
head of global equity income at Janus Henderson. “These companies are investing; I think that’s the relevant thing. You can’t accuse Apple and Microsoft and Meta of not investing.”
Goldman Sachs Group analysts said in a report last week that shares of companies that put their cash to work through buybacks and dividends have beaten those that favor capital expenditures and mergers and acquisitions over the past 25 years.
In his State of the Union address, Biden also criticized big oil companies for using record profits to buy back shares instead of investing in increased domestic production. Oil companies were by far the largest driver of buyback growth last year and continued to stand out as big buyers in the first quarter of 2023, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
“Clearly, we’re looking to share our success with shareholders, and you see that through a more consistent share-repurchase program and a growing dividend,”
Chief Financial Officer
said on the company’s earnings call in April.
Some companies favor share repurchases over dividends as a way to return capital to shareholders because they allow more flexibility to pause the programs. Companies typically slash their dividends only as a last resort to save cash, a move that often hurts their share prices.
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Yet buybacks can be cyclical as evidenced by a major drop-off after the pandemic-induced recession in 2020. And the recent rise in financing costs could also reduce their appeal if interest rates stay higher for longer. During the low-rate days of 2020 and 2021, many companies issued bonds specifically to finance share repurchases.
Many of the biggest share repurchasers, like Apple and Microsoft, are still sitting on massive cash piles. Other, smaller companies may feel the pinch sooner. The average cash balance of S&P 500 companies has dropped by 13% over the past 12 months, according to the Goldman report.
“I wouldn’t be surprised if buybacks slow, just because now the cost of debt is much higher,” Lofthouse said. “The math doesn’t work as well now. If you see a significant U.S. recession, you’d probably see a pullback in buybacks.”
Write to Jack Pitcher at [email protected]