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US Stock Buybacks – A Long Term Perspective

Traders Magazine Online News, June 20, 2018

Nicolas Colas

The following item appeared in a recent newsletter by Nicolas Colas, co-founder of DataTrek.


US stock buybacks are much in the news of late, a plug-and-play narrative for a range of issues. They get the credit for domestic equities sitting near all time highs and the blame for low wage growth and income equality. We only know this: once a grimy financial topic like corporate asset allocation hits the mainstream, it will likely be twisted beyond recognition. And that’s exactly what has happened…

To clear some of the air around the topic – and consider what buybacks actually say about current US equity prices – we went to the S&P Dow Jones Indices and pulled the data for dividends and buybacks for the 500 back to the beginning of 2006. Here’s what we found:

#1. It is actually fair to say large US public companies have a reinvestment problem, but it goes back much further than just the last 12 months (when the criticism about buybacks really kicked into high gear). The numbers:

In 2006 the companies of the S&P 500 paid out 89% of their operating earnings in the form of buybacks and dividends. That left only 11% to be reinvested in their businesses, saved as cash, used to pay down debt, or to fund acquisitions.

In 2017, that buyback/dividend payout ratio was 88% - essentially the same as 2006.

In the 11 years in between, aggregate (dividends plus buybacks) payout ratios show exactly what you would expect: tremendous cyclicality. They peaked in 2008, at 136% of operating earnings, and troughed in the 4 quarters ending Q1 2010 at 60%.

The bottom line here is that by the time a company is large enough to be included in the S&P 500, its incremental capital needs in excess of depreciation/amortization are largely behind it. If the company spends a lot on R&D, this tends to grow in line with revenues and therefore not crimp earnings/cash flow at the margin either. Operating cash flow therefore can go into the bank (at low returns), pay off debt (also low return), to make an acquisition (a risky return, and historically subpar), or pay for dividends and buybacks. The last 2 at least have the advantage of signaling earnings power or covering the company’s cost of capital.

#2. Contrary to popular belief, stock buybacks in the S&P 500 are not at all-time highs. The data here:

The annual record for cash spent on buybacks was back in 2007, at $589 billion.

The trailing 4-quarter peak in the current cycle is also $589 billion, in Q1 2016. When you inflation-adjust the 2007 numbers, however, it works out to $706 billion in today’s dollars.

In 2017, S&P 500 companies bought back $519 billion of their own stock, or 12% below the 2016 highs.

This neatly knocks out the narrative that US stocks are near all-time highs simply because of record buybacks. If the correlation were 100%, the S&P 500 would have topped out in Q1 2016 when 1-quarter buybacks totaled $161 billion. In Q4 2017 they were “just” $137 billion.

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