By: Wayne Duggan
A major theme of the bull market in U.S. stocks of the past has been unprecedented corporate buybacks. Despite recent trade war-related weakness, the major indices remain within a stone’s throw of all-time highs.
But the strength and length of this run has left some wondering what role buybacks have played in the more-or-less constant demand for stocks. By at least one measure, corporate stock buybacks are at their highest level since just prior to the 2008 financial crisis.
In 2018, S&P 500 companies bought back a record $806 billion in stock in the wake of the U.S. corporate tax cuts. For some perspective, the new record was a whopping 37% higher than the previous record set back in 2007. Another way of looking at it is that there are only three companies in the entire S&P 500 with market caps larger than $806 billion.
S&P 500 companies bought back 55 percent more shares in 2018 than in 2017, led by Apple, which spent a whopping $74.2 billion on stock repurchases last year. Over the past 10 years, Apple alone has repurchased more than $260 billion of its own stock, roughly in-line with what it might cost to acquire a company like Walt Disney or Mastercard.
Companies tend to repurchase stock when they have excess cash. By buying back shares of stock, companies reduce their outstanding share count, thereby increasing demand.
Some high-profile critics of the practice, including Democratic Senators Bernie Sanders and Chuck Schumer and Republican Senator Marco Rubio, have called for limits to the amount of buybacks companies can have. In February, Schumer and Sanders said share buybacks contribute to the wealth gap in America. Because the top 10 percent of the wealthiest Americans own 85 percent of the country’s stock, buybacks tend to disproportionately benefit the wealthy, Sanders and Schumer argued.
In addition, a recent letter from SEC commissioner Robert Jackson revealed that many company insiders sell significant amounts of stock into the open market right after their companies announce large buyback plans.
Essentially, he argued, these insiders are using the buyback announcements—which typically cause stocks to pop—as an opportunity to sell some shares. And while that’s their prerogative, Jackson pointed out that companies that routinely buy back stock tend to underperform over time. Critics say insider selling shouldn’t be happening if the executives truly believe buybacks are a good way to invest the company’s cash.
Other experts have stepped up in defense of buybacks.
“Excess corporate cash is something like a hammer in search of a nail, DataTrek Research co-founder Nicholas Colas recently wrote. “From a shareholder perspective, whacking away at buybacks is preferable to companies deploying that cash in suboptimal internal projects or (even worse) large acquisitions.”
But while politicians and experts debate the merits of buybacks, note this: prior to 2018, the only other time in history S&P 500 corporate buybacks exceeded S&P 500 capital expenditures by such a wide margin was 2007.
* The author is long AAPL.
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