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No Stoppin' It Now! S&P 500 Stock Buybacks Continue at Rapid Pace Through Market Turbulence

May 16, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
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  • US large-cap companies, specifically those that are members of the S&P 500 Index, are continuing to buy back common stock at a rapid pace despite growing worries about global growth, trade negotiations, and various geopolitical risks among investors. According to the Wall Street Journal, the current market volatility is unlikely to stop their hasty share repurchases, similar to the scenario of the December 2018 downturn.  
  • In the fourth quarter of 2018, S&P 500 companies announced a record $222.98 billion in share buybacks despite the index falling 9.18% in the month -- at one point, the S&P 500 neared bear market territory!  
     
  • As the Wall Street Journal discusses, market downturns present a dilemma for companies who intend to repurchase common stock: on one hand, it may be smarter for the company to keep extra cash on hand if the market rout extends; on the other hand, it may be more opportunistic for the company to repurchase common stock while its trading at a relative discount, stretching each dollar further.  
     
  • Through the first quarter of 2019, S&P 500 companies to announce quarterly financials have reported a massive $180 billion in share buybacks -- according to S&P Dow Jones Indices, the S&P 500 members are on pace to buyback $215 billion in common shares, which would be the second-most on record! 
     
  • Some strategists, such as Chief US Strategist at Ned David Research Group Ed Clissold, are interpreting S&P 500 companies’ continued share repurchasing through the two recent periods of market turmoil as a sign of confidence that the current uncertainty will be short-lived. Clissold elaborated to the Wall Street Journal that, “Companies will do a lot to avoid cutting or suspending a dividend, so if prospects deteriorate, buybacks are the first thing they take away.”   
     
  • Not all investors believe that share buybacks are healthy for markets, or even valuable to shareholders. As the Wall Street Journal explains, some believe that companies spend billions of dollars in profits to repurchase shares and simply make profits appear stronger by boosting EPS.
     
  • Analysts have theorized that companies’ growing willingness to invest in share buybacks has been among the top drivers of the current 10-year US equity bull market. As US stocks approached downturns, elevated share buybacks may have helped buoy stock prices by introducing extra demand.
     
  • It is also worth noting that during 2018, S&P 500 tech companies accounted for 42% of all share buybacks, a huge spike from just 32% in 2017.  
     
  • Howard Silverblatt, a Senior Index Analyst at S&P Dow Jones Indices, believes that share buybacks will likely continue at a robust pace. “The presumption is that 2020 will be a good year for buybacks, but that’s based on expectations that the economy remains strong and we don’t have a trade war,” Silverblatt explained to the Wall Street Journal.

 

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