Some politicians have portrayed share buybacks as capital-hungry American companies and wage workers enriching the bad corporate fat cats.
The criticism is largely false because companies have actually returned a similar percentage of their profits to shareholders for decades. Buybacks are a new, more ad-hoc way of doing this. Steady dividends, retirees’ bread and butter but financially similar to buybacks, will never face the same vitriol. A better way to address inequality would be to raise the corporate tax 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, may be rhetorical in an election year, but investors have a bigger problem than potential political interference: high buyback activity. Indicates a top market.
The most legitimate criticism of stock buybacks, which now assume dividends in dollar terms, is that corporate executives are terrible market timers. Strategist Ed Yardney has observed that buybacks are most closely tied to profits and share-based executive compensation, both of which are currently near record levels. Boards increase buybacks when the wind is behind them, which is also the case when their share prices reflect that optimism. What happens to specific companies happens to the market as a whole.
Just take last year, which set a new record for S&P 500 buybacks. According to data from Howard Silverblatt, senior index analyst at S&P Dow Jones, they were up 131% year-on-year in the third quarter and 107% in the fourth quarter — the two fastest increases since the rebound from the global financial crisis. index.
Previous multi-year 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 the quarters saw stocks break records and start sliding into a bear market.
In contrast, the major return to buyback activity occurred in the second quarters of 2020 and 2009, with year-on-year declines of 46% and 73%, respectively. Both the quarters saw a bear market decline.
A sharp increase in buybacks does not necessarily indicate a market top, nor does a sharp decline automatically create a buying opportunity. But another consequence of poor market timing by corporations is that they give investors little bang for the buck as the market moves bullish.
For example, while combined cash paid out through dividends and buybacks rose 10% in 2021 compared to 2018 to nearly $1.4 trillion, their combined yield — a percentage of the value of the S&P 500 — increased from more than 6% to 3.5%. decreased from , The more sustainable part of that payout, the dividend yield, was 1.27% — the lowest since the peak of the technology bubble.
Furthermore, the source for the buyback reads like a list of recent winners, not future ones. Apple led with $88.3 billion in 2021, followed by Facebook-owned Meta Platforms with $50.1 billion. Go back a decade and 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 profit from huge stock buybacks, but they should probably feel a little nervous.
This story has been published without modification in text from a wire agency feed