One. Trillion. Dollars!
The criticism is largely misplaced because companies have in fact returned a similar percentage of their profits to shareholders over the decades. Buybacks are simply a newer, more ad hoc way of doing that. Stabler dividends, the bread and butter of retirees but financially very similar to buybacks, would never face the same vitriol. A far better way to address inequality would be to raise corporate taxes or the minimum wage.
The fact that buybacks for the S&P 500 are set to top $1 trillion this year, according to
Goldman Sachs,
might up the rhetoric in an election year, but investors have a larger problem than possible political interference: High buyback activity signals a toppy market.
The most legitimate criticism of stock buybacks, which now eclipse dividends in dollar terms, is that corporate executives are awful market timers. Strategist
Ed Yardeni
has observed that buybacks dovetail most closely with profits and share-based executive compensation, both of which are near record levels currently. Boards tend to increase buybacks when the wind is at their backs, which is also when their share prices reflect that optimism. What goes for specific companies seems to hold for the market as a whole.
Take last year, which set a fresh record for S&P 500 buybacks. They were up by 131% year-over year in the third quarter and by 107% in the fourth quarter—the two sharpest increases since the rebound from the global financial crisis, according to data from
Howard Silverblatt,
senior index analyst at S&P Dow Jones Indices.
Previous multiyear peaks were seen in the third quarter of 2007 and the first quarter of 2000 with year-over-year gains of 57% and 43%, respectively. Both quarters saw stocks hit a record and begin sliding into a bear market.
By contrast, big retreats in buyback activity occurred in the second quarters of 2020 and 2009 with year-over-year drops of 46% and 73%, respectively. Both quarters saw bear-market bottoms.
A sharp increase in buybacks doesn’t necessarily signal the top of the market, nor does a sharp decline automatically make for a buying opportunity. But another consequence of poor market timing by corporations is that they deliver investors less bang for the buck as markets rally.
For example, while combined cash paid out through dividends and buybacks rose by 10% in 2021 compared with 2018 to nearly $1.4 trillion, their combined yield—the percentage of the S&P 500’s value—dropped precipitously to less than 3.5% from more than 6%. The more durable portion of that payout, the dividend yield, was 1.27%—the lowest since the peak of the technology bubble.
Moreover, the source of buybacks reads like a list of recent winners, not future ones. In 2021
Apple
led the way with a whopping $88.3 billion, followed by
owner
Meta Platforms
at $50.1 billion. Go back a decade and the leaders include
Exxon Mobil,
AT&T,
International Business Machines,
Oracle,
General Electric,
Walmart
and
Philip Morris International.
Investors don’t need to feel dirty when they benefit from hefty stock buybacks, but maybe they should feel a bit nervous.
Write to Spencer Jakab at [email protected]
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