It’s been impossible to miss all the yelling about how stock buybacks are inflating the longest rally in U.S. history.
America’s 500 largest companies are poised to spend almost $1 trillion removing shares from public markets this year, according to Goldman Sachs Group Inc. Apple Inc. recently announced plans to repurchase an extra $75 billion of its stock. And everyone from presidential hopeful Bernie Sanders to Lloyd Blankfein, Goldman’s former chief executive officer, has opined on the impact these purchases have on companies, the market and society.
There’s certainly a lot of cash at stake, but buybacks are not solely responsible for the bull market. First, the billions spent on them are about 1% of all the shares that change hands on U.S. exchanges every year. It’s a big and visible source of net demand, but a small portion of overall trading. Second, a handful of companies are responsible for most of the dollars -- this is not a free-for-all. And third, stock repurchases have probably not come at the expense of investment.
“The narrative that buybacks are evil and are the only thing propping up the market is overstating the case,” says Ed Clissold, chief U.S. strategist at Venice, Florida-based Ned Davis Research Inc. “The other part of the story is that companies have been profitable and investors have gotten more comfortable since the financial crisis being in equities, and that seems to be far more important.”
Cash Cow
Buybacks involve a company gradually bidding for stock in the market or giving shareholders an option to tender their stakes. By removing stock, a company theoretically improves its earnings per share, and can buoy its valuation.
Typically they’re deployed if a company decides that other uses of its cash -- such as strategic acquisitions or business investment -- won’t yield a sufficient return. The problem comes, or so the argument goes, when everyone’s doing it.
Spending on share repurchases jumped more than 50% to $819 billion in 2018, and is set to climb to $940 billion this year, according to Goldman. That’s a big one-way bet on the stock market, with repurchases boosting valuations to the tune of about 19% over the last eight or so years, according to a study by Ned Davis Research. (The firm subtracted the value of repurchases from the benchmark’s dollar return.)
That sounds like a lot, but the S&P 500 has climbed 166% during the same period and is up 12% this year alone. And that’s if the money used for buybacks just disappeared; the market would be just 2% lower if companies reinvested their extra cash instead of repurchasing stock, the firm says. Yardeni Research Inc. concluded in a March report that buybacks have no significant impact on earnings per share, and a gauge of shares outstanding has fallen just 0.3% a year during the last decade.
Embedded in arguments that repurchases explain the bull market is the idea that if companies weren’t buying, nobody would be. And indeed, on a net basis, subtracting buying from selling, corporations are perhaps the single biggest source of demand for equities. On the other hand, the sprawling U.S. stock market sees an enormous volume of shares go back and forth among buyers and sellers each day. When they represent as little as 1% of value traded, how pervasive are companies in setting prices?
More than $80 trillion of equity trading takes place in America every year, data compiled by Bloomberg show. About 51.5% of that is high-frequency firms, according to Tabb Group data, with the rest divided among groups like hedge funds, retail clients and quants. Buybacks are included in a category of long-only investors that also includes mutual funds and ETFs that together make up 12% of volume. And regulations minimize the impact of repurchases on share prices by limiting when and how much a company can trade.