Stock Buybacks Up 50% to $384-B
The biggest use of cash among S&P 500 companies is making their public footprints smaller, a strategy that is paid dividends in 2018.
According to Goldman Sachs (NYSE:GS), aggregate share repurchases aka buybacks, rose by nearly 50% to $384-B in 1-H of Y 2018. That tops the $341-B spent on capital expenditures, which are rising at the fastest pace in at least 25 years.
“For the first time in 10 years, buybacks are garnering the largest share of cash spending by S&P 500 firms,” writes Goldie’s chief U.S. equity strategist. “Capital spending has typically represented the largest single use of cash by corporations, a position it has held for 19 of the past 20 years.”
Awash with cash in light of a lower tax burden, corporate executives are electing to spend more on making themselves smaller rather than bigger, a bet that’s rewarded shareholders.
A basket of stocks with the highest buyback yield is besting both the S&P 500 Index (SPY) as well as a collection of firms that invest the most relative to their market capitalization.
However, limits on companies’ ability to conduct discretionary buybacks ahead of their earnings announcements constitutes “a near-term risk” for US stocks as this removes one potential buyer of any dips, which could exacerbate moves to the downside.
“Since 2000, S&P 500 returns have been comparable in blackout and non-blackout periods, but realized volatility has been nearly 1 point higher in blackout periods than when a majority of firms are free to repurchase stock,” the strategist writes.
The Y 2018 increase in share shrinkage is fairly narrow, with Apple (NASDAQ:AAPL) alone accounting for about 25% of the rise in buybacks. Goldman’s buyback desk expects repurchase authorizations to top $1-T in Y 2018.
Critics contend that buybacks are a product of self-interested, short-term thinking among executives that exacerbate wealth inequality and come at the expense of activities that would boost economic activity and a firm’s longer-term prospects.
But the near 20% rise in business investment during 1-H among S&P 500 companies highlighted by Goldman suggests that genuine growth opportunities are not being starved of capital.
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