Politicians hate them, the tax collector is coming for them, and credit-market Cassandras say now is not the time to be blowing through discretionary cash. And yet stock buybacks have never been more popular with the constituency that counts: the companies shelling out.
Ten months into 2022, American firms have announced repurchases totaling $1 trillion, up 8% from a year ago and on course for an annual record, according to data compiled by Birinyi Associates.
That the spending should be so prodigious is notable on several fronts, among them that it bucks a longstanding trend in which companies reined in repurchases when share prices were collapsing. It’s also a vote of confidence -- some would say recklessness -- in balance sheets that, while flush with $2 trillion in cash, face mounting stress with a recession at hand.
“While the stock market has traded meaningfully lower, companies remain on sound footing,” said Jeff Rubin, director of research at Birinyi Associates. “Actions speak louder than words. While CEOs say they are concerned about inflation, a possible recession, and rising interesting rates, they are not hoarding cash and instead see value in their shares.”
Spending money on stock has repeatedly drawn criticism from politicians and academics who say the cash would be better used on things that aim at boosting long-term growth, such as equipment upgrades or employee benefits.
Congress has passed a law that will impose a 1% tax on buybacks starting next year. Last week, President Joe Biden said oil producers shouldn’t be returning record profits to shareholders via higher buybacks and dividends while Russia wages war in Ukraine.
Corporations aren’t deterred. At the current pace, the planned share repurchases would amount to $1.25 trillion, breaking an annual record for a second straight year, Birinyi’s data show.
By contrast, during the pandemic in 2020, intended buybacks tumbled more than 40% from the prior year. At the height of the 2008 financial crisis, repurchases plunged almost 60%.
Read more: All About Stock Buybacks, a $1 Trillion Market Force: QuickTake
For those fretting over credit risk in the era of rising rates, the expenditure is perhaps all anyone needs to know about how concerned companies are about repaying their loans.
For investors, on the other hand, the steady demand underpinned by repurchases is one of the few upward forces left in the market. It also highlights a risk: betting against stocks at a time when earnings season kicks into full gear and companies emerge from what is generally assumed to be a blackout period for buybacks.
By the tally of Deutsche Bank AG, the proportion of S&P 500 firms under blackouts is expected to drop to below 10% at the start of November, down from almost 90% earlier this month. That means, corporate demand could return as a reliable source of support.
Buybacks could reach as high as $5 billion a day, according to an estimate by JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou.
It’s a bull case that’s worth heeding when stocks just scored their best week in four months amid speculations over a slowing pace in Federal Reserve tightening. Further gains could force rules-based traders such as commodity trading advisers to boost equity holdings, according to JPMorgan’s trading desk.
“The length and magnitude of any rally may be dependent on what we get from the Fed on Nov. 2 and the CPI print on Nov. 10,” the firm’s team including Andrew Tyler wrote in a note. “That said, be cognizant of CTA activity kicking in as we move higher as well as an increase in buyback activity.”
Companies have at times acted as a source of support during this year’s selloff. In June, for instance, when hedge funds were furiously selling stocks, Goldman Sachs Group Inc.’s unit that executes share buybacks for clients saw volume spiking to what was then the highest level of 2022.
Repurchases tend to keep equity losses from snowballing. The S&P 500 Buyback Index, tracking the top 100 stocks with highest repurchases, is outperforming the broader benchmark by roughly 5 percentage points this year.
The willingness of corporate America to dole out more money for their own shares is at least a vote of confidence in their ability to generate profits, according to Josh Wein, a portfolio manager at Hennessy Funds.
“Ultimately, it’s an acknowledgment that there aren’t growth opportunities, but that’s not always a bad thing,” he said. “It speaks to the strength of balance sheet, but also in this case, the idea that we’re likely, if not already, entering a recession, and it could be a shallow one.”
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