“It’s mind boggling, but it’s just what the U.S. market does every day,” said Phil Mackintosh, chief economist at Nasdaq. “The equity markets are just so liquid and a lot of people don’t quite appreciate it.”
Who’s Who?
Initial public offerings, which are forecast to raise $100 billion in 2019, and secondary placements further offset some of the buybacks. Goldman found corporations’ net demand for U.S. equities to be about $509 billion last year, with pension funds and mutual funds among those on the other side of that trade. But far from portending a sell-off if corporate money eventually dries up, those sales could reflect portfolios rebalancing after a long rally, according to Ned Davis’s Clissold.
The net number also disguises which companies are actually undertaking buybacks. The financial and technology sectors dominated last year, with virtually no activity in energy, real estate, communication services or utilities among corporate clients of Bank of America Merrill Lynch, which sees a similar trend in 2019. Indeed, 20 companies accounted for more than a third of cash spent on repurchases last year, and almost 70% of their growth, Goldman said in a March report. Apple alone accounted for 14% of the rise in buybacks.
“It is more of a large-cap U.S. story,” says Steven Wieting, global chief investment strategist at Citigroup Private Bank. “If you look at buybacks relative to market cap, there will be less concentration.”
To be sure, arguing buybacks aren’t doing much to lift stocks may do more to buttress than debunk the view that they’re a societal waste. Why blow so much cash if the rewards are uncertain? After all, claims that repurchases benefit people who are already rich tend to be secondary to the critique that the money would be better spent elsewhere -- particularly when a lot of it stems from federal tax cuts.
“When corporations direct resources to buy back shares on this scale, they restrain their capacity to reinvest profits more meaningfully in the company in terms of R&D, equipment, higher wages, paid medical leave, retirement benefits and worker retraining,” wrote Sanders and Senator Chuck Schumer for the New York Times in February.
The duo propose banning buybacks -- which have only been permitted for the last 37 years -- unless a corporation has already invested in its staff.
But Ed Yardeni, chief investment strategist of Yardeni Research, says that’s exactly what buybacks are being used for. Rather than returning money to shareholders, they offset stocks distributed to a company’s employee stock plan, he wrote in a March report.
Other Uses
Repurchases can, however, also mean a bonus for a company’s directors, something that’s drawn the ire of politicians. “A lot of corporate executives are incentivized to improve the price of the stock,” says Tabb Group’s Larry Tabb. “If I as a manager have a stock option, the best incentive for me would be to buy the stock back because that improves the price of my options which then ends up in my pocket.”
Yet companies do seem to be plowing money back into their businesses when it makes sense. Growth investment has won the most corporate cash for the last three decades, and companies increased capital expenditure and research-and-development spending 13% in 2018 to $1.1 trillion, according to Goldman. AQR Capital Management found in a paper last year that investment activity has steadily increased over the last 30 years.