Displaying items by tag: buybacks

(New York)

Buyback stocks have developed a poor reputation recently. Stock buybacks are seen as financially irresponsible and a way for executives to manipulate earnings and share prices. While that may be true to a degree, they also happen to be a great way for companies to return money to shareholders. Additionally, and what is not well understood, is that buyback stocks have a great track record historically. Since 1995, the one hundred S&P 500 stocks with the highest level of buybacks have significantly outperformed the index, earning a 13% return versus the index’s 10%. The same is true for the Russell 3000, so it is not just a case of buybacks working for large caps.

FINSUM: Yes, buybacks may be at their highest total levels historically, but they are flat as a percentage of earnings, so buying hasn’t been any less conservative than in the past. The other good thing is that buyback stocks are usually cheaper than average.

(New York)

Beyond high valuations and a potentially worrying economy (not to mention a trade war), there is something else investors need to worry about. Goldman Sachs is warning investors that S&P 500 companies are engaging in unsustainable financial payouts. The bank shows that in the year ending in March, companies in the index spent about 104% of their free cash flow on buybacks and dividends. It is the first time since before the Crisis that companies spent more on payouts than they generated in free cash flow.

FINSUM: So far this behavior is not hurting companies because investors are okay with extra leverage given the likelihood of Fed easing, but this is definitely a warning sign of financial excess.

(New York)

Something the market has not had to deal with for some time is once again occurring. That change? Slumping buybacks. Hiked dividends and big buybacks have been staples of the this historic bull run, but the latter are starting drying up. Share repurchases shrank for the first time in seven quarters in the second quarter. The total amount of buybacks—over $200 bn—is still quite robust, but it is a sign that companies are tightening up, which could be indicative of the overall direction of the economy.

FINSUM: This is immaterial. In 2018, companies spent $800 bn on buybacks, so $205.8 bn (the 2nd quarter’s figure) is actually ahead of pace.

(New York)

One the tail risks for markets right now is the sharp downturn that is supposed to happen to the stock buyback market. Huge levels of corporate buybacks have been supporting US equities for years, but that is forecast to drop dramatically. While that may wound US stocks, it poses a major opportunity for another area: Europe. European stocks don’t see much in the way of buybacks, which has left them much less loved than the US recently. However, the declines in US buybacks are likely to make Europe look much more attractive.

FINSUM: European valuations are significantly more attractive than in the US, which means that if the playing field gets levelled by decreased buybacks, there is probably a good opportunity here. That said, Europe has a lot of economic issues right now.

(New York)

Are you hoping for a return to big company buybacks? For the few years before last year’s big losses, buybacks were a big part of the nice returns seen by the market. A return to such behavior, while questionable on the part of companies, would likely help support share prices. Well, JP Morgan thinks it’ll be another major year for buybacks. Just like last year, companies are expected to announce over $1 tn of buybacks on the back of the benefits from Trump’s tax cuts. Overseas cash is expected to help power the repurchases.

FINSUM: We are not particular fond of the underlying financials of buybacks (at least when companies issue debt to do so), but do think this would be very supportive of share prices this year.