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Stock Buybacks on the Rise as S&P 500 Companies Return Cash to Shareholders

CAPEX, R&D spending remains strong, too, and could help sustain economic growth.

Last year’s tax reform has been a boon for shareholders of companies in the S&P 500 – with companies on pace this year to return upwards of $1 trillion to shareholders in the form of dividends and buybacks.

And for the first time since 2007, companies in the S&P 500 are splashing out more cash on buying back their own stock than they are on capital expenditures (CAPEX). Yet while the dollar value of buybacks for companies in the index through the first half of 2018 is up by nearly 50%, companies in the S&P 500 aren’t skimping on CAPEX and research & development (R&D) spending either.

S&P 500 companies bought back $384.0 billion of stock in the first half of 2018, up 48% from the same period a year ago, according to figures from Goldman Sachs cited here in this CNBC report. The pace of capital returns to shareholders via buybacks appears to have accelerated in the third quarter as well, totaling $762 billion this year through mid-September, according to the Goldman Sachs data, cited in the CNBC report 1.

CAPEX spending for companies in the index is up 19% compared to a year ago. That represented a $55 billion increase to $341 billion. Even though that figure trails that of what companies have splashed out to buy back their shares, it is on pace to be the biggest year for CAPEX in a quarter century. Companies also increased R&D spending by 14% to $147 billion, the highest increase in a decade.

“Rumors of the demise of capital spending have been greatly exaggerated,” David Kostin, Goldman Sachs’ chief U.S. equity strategist, said in a research note, cited in the CNBC report.

A closer look, though, does show that buybacks and capital investment spending are clustered among a smaller set of companies within the S&P 500. The 10 largest CAPEX spenders represented 53% of the total spending increase, while the 10 biggest spenders on share buybacks comprised 78% of the total growth for the index, according to the Goldman Sachs data, cited in the CNBC report.

U.S. Market Outperforming International Markets

The return of cash to investors has been one factor helping lift the S&P 500 to a series of record highs in recent weeks after the index had entered an official correction following losses in late January through March. Stellar corporate earnings have also underpinned the S&P 500’s performance this year.

With nearly all companies in the S&P 500 reporting earnings as of September 14, aggregated earnings for the second quarter are on pace to rise by 24.9% compared to a year ago, according to Thomson Reuters I/B/E/S2.

And despite trade tensions over the continuing escalation of tariffs – particularly between the U.S. and China – and other turmoil in emerging markets, the U.S. stock market continues to outshine other international markets. Year-to-date, the S&P 500 has gained 8.6% through September 18. In contrast, the MSCI All Country World Index (ACWI) ex USA is down 6.53% during the same period.

A technical analysis of 47 markets in the MSCI ACWI by Benjamin Bimson, BCJ’s chief investment officer3, found that less than 50% of those markets have rising 200-day moving averages – even as the overall ACWI is in a long-term upward trend. The trend analysis is one way to gauge the health of international markets, and when there’s been a steep drop in the upward trend of the ACWI, the risks of global recessions rise, the analysis notes.

And the relative performance of the S&P 500 compared to the MSCI ACWI has picked up since the end of May. Other positives for the S&P 500 compared to the MSCI ACWI include technical factors like the S&P 500’s upward trend for its 50-day moving average, and market breadth with a higher number of individual shares rising over time rather than declining.

“This is evidence that the US market has not only remained strong, despite the ongoing trade-war, but has also increased out performance relative to foreign stock markets,” the BCJ analysis notes.

Buyback Influence to Wane in Coming Weeks

Companies generally aren’t able to repurchase their shares within five weeks of their quarterly earnings and up to 48 hours after they report earnings. This buyback blackout period can add to market volatility as companies buying support wanes. With the third quarter ending this month, more companies are set to enter the blackout period.

According to this MarketWatch report on Sept. 184 citing data from Goldman Sachs, 18% of companies in the S&P 500 were currently in their blackout period, though that figure is expected to rise to 86% by October 5.

“Buybacks provide a tremendous amount of support to the market, and with blackout season coming, we won’t have that added measure of support,” Scott Glasser, the co-chief investment officer of ClearBridge Investments, said in the MarketWatch report.

 

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Sources:

1 https://www.cnbc.com/2018/09/17/companies-are-using-the-tax-cut-both-to-buy-back-their-own-shares-and-to-invest-in-the-future.html

2 http://lipperalpha.financial.thomsonreuters.com/2018/09/this-week-in-earnings-9/

3 http://bcjinsights.com/will-global-politics-spook-the-markets/

4 https://www.marketwatch.com/story/this-hidden-factor-could-soon-make-stocks-much-more-volatile-2018-09-17

Market Data:

S&P 500:

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F29%2F17&x=33&y=21

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F18%2F18&x=50&y=22

MSCI ACWI ex USA:

https://www.msci.com/end-of-day-data-search

Securities offered through World Equity Group, Inc., member FINRA and SIPC, a Registered Investment Adviser.

Investment Advisory Services offered through BCJ Capital Management, a (SEC) Registered Investment Adviser.

BCJ Capital Management and DBA name are not owned or controlled by World Equity Group, Inc.

Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 18-166

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