Buybacks break record after backtracking in 2020

Companies in the S&P 500 repurchased $234.5 billion in shares during the third quarter, topping a previous record of $223 billion in the fourth quarter of 2018, according to preliminary data from the S&P Dow Jones Index. A wave of share buybacks has helped propel US stock indexes to dozens of records in 2021. The S&P 500 is up 25% this year, closing a record 67.

More buybacks are coming. Howard Silverblatt, senior index analyst for the S&P Dow Jones Index, said he expects S&P 500 buybacks to reach $236 billion in the fourth quarter.

S&P 500 constituent Microsoft Corp said in September that its board had approved a plan to repurchase up to $60 billion of its stock. Car-rental company Hertz Global Holdings Inc. recently said it would buy back up to $2 billion of its stock, while tech company Dell Technologies Inc. is planning a $5 billion share-repurchase program.

Buybacks are just one force behind the stock market’s rally. Policymakers continue to benefit asset prices from monetary and fiscal support to help the economy recover from the pandemic. And analysts continue to underestimate corporate earnings, which are expected to grow 45% in 2021 for companies in the S&P 500.

Investors will check for signs this week of the Federal Reserve’s two-day policy meeting, where officials may expedite the process of shutting down the bond-buying stimulus program. Central bank officials may also throw light on their expectations of a hike in interest rates next year.

S&P 500 buybacks fell from about $199 billion in the first quarter of 2020 to less than $89 billion in the second, as companies reeling from the start of the pandemic moved to conserve cash. Share repurchases increased in each of the following quarters, reaching again close to $199 billion in the second quarter of 2021.

Repurchases can support shares by reducing a company’s share count, increasing profits per share. And they can boost investor sentiment by suggesting that executives are optimistic about their companies’ prospects and confident in their financials.

“It’s always comforting to have a management team come in and tell you how much they undervalue their stocks,” said Anne Viceland, a portfolio manager at Easterly Investment Partners. “It’s a vote of confidence in the long-term outlook.”

His team bought shares of Lockheed Martin Corp. over the summer, partly because of the defense company’s share-buyback program and dividend yield. Shares of Lockheed fell 12% on October 26, when the company reported lower-than-expected quarterly sales and lowered its full-year sales forecast. Ms Viceland said she believes the shares are undervalued and continue to be liked.

Stock buybacks have come under attack from politicians who say companies should use cash to invest in their businesses rather than support the prices of their shares. The version of the $2 trillion education, health care and climate spending package passed in the House in November would create a 1% tax on the net worth of the company’s stock buybacks.

The Senate has yet to vote, but the buyback tax has so far generated less corporate opposition to the bill than other tax increases. Strategists at the BofA Global Research Project said the proposed tax would result in a 0.3% reduction in S&P 500 earnings per share, assuming companies do not change the amount of stock they repurchase.

Many investors said they do not believe the tax will have much of an impact on companies’ behavior if it becomes law. “The 1% tax on buybacks is so low that I don’t think it will affect anything,” said Olivier Sarfati, head of equities at wealth-management firm GenTrust.