We May Be About To See Even More Buybacks

We May Be About To See Even More Buybacks
Theodora Lee Joseph, CFA

over 1 year ago2 mins

Mentioned in story

Inflation is making everything more expensive – except stocks. If you bought a slice of the S&P 500 now, you’d get a 20% discount off the price from the start of the year. And judging by the current pace of share buybacks, companies seem to think there’s good value in their shares. After all, companies tend to think of cash the same way you do. They choose to save by hoarding it on their balance sheets, spend by redistributing it back to shareholders via share buybacks and dividends, or invest in growth through capital expenditure or mergers and acquisitions.

Share buybacks are good for stocks because they provide some downside support to share prices. But typically, in a recessionary environment, most companies would choose to be cautious and save their money instead. That explains why the amount of share buybacks (black bars against the right-hand axis) fell drastically during the last two recessions (pink bars). This time, by contrast, repurchases from US companies have already totalled $1 trillion and are expected to top $1.25 trillion by the end of the year, according to research firm Birinyi Associates. That’s an 8% increase compared to last year and signals two important things. Firstly, companies see value in their shares, even as interest rate increases drive up the cost of capital. Secondly, while these moves are an acknowledgement that there aren’t many growth opportunities out there, they’re also a vote of confidence in the economy.

Congress recently passed a law that will impose a 1% tax on buybacks starting next year, which means that the rate of buybacks could speed up in the next couple of months as companies rush to get those transactions done before the tax comes into effect. To benefit from such a trend, you could consider the SPDR S&P 500 Buyback ETF (ticker: SPYB; expense ratio: 0.35%), which holds companies with some of the highest recent buyback ratios.

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