Shareholders in the biggest US companies stand to receive a record $1tn in cash this year, as blue chips’ concerns over the global economic outlook have diverted cash away from investment and is driving a boom in buybacks and dividends.
Shareholder returns reached more than $903bn in 2014, with $350bn in dividends and $553bn in buybacks, official data from S&P Dow Jones Indices show. It expects buybacks to rise at a “double-digit” rate this year.
Dividends have climbed on average 14 per cent annually over the past four years. Many strategists expect this pace of growth to continue this year, which would put returns at just above $400bn. Goldman Sachs forecasts buybacks to reach $604bn. Combined, returns would surpass the $1tn mark for the first time in US history.
The combination of slowing emerging market economies, concerns about the pace of the recovery in some developed markets and falling oil prices are driving down expectations for capital investment growth. This has prompted US blue chips to shift their focus, becoming the largest buyers of shares on the S&P 500 since the financial crisis, dwarfing domestic investors and helping propel the ageing bull market into its seventh year.
“There are tremendous amounts of cash on the books and you have this very slow nominal growth in most countries, so there are fewer places to deploy that cash,” said Russ Koesterich, BlackRock’s global chief investment strategist.
The $1tn figure has been primed by General Electric’s announcement on Friday that it will return some $90bn to shareholders over the next three years as it disposes of the vast majority of its financial business.
And analysts are expecting Apple to lift its programme later this month, with Credit Suisse estimating the iPhone maker could increase its existing $130bn scheme, which runs over several years, by 50 per cent.
Some companies that are generating strong profits, such as Apple, have also come under pressure from activists in recent years from investors pushing for a greater slice of the pie.
With record cash levels of $1.3tn in 2014, Nicholas Colas, chief market strategist at Convergex, said that companies believed increasing returns to shareholders was “ the right thing to do versus just hoarding the cash”.
But critics see the buybacks as rewarding company executives and their share-option plans, and argue that a focus on shareholder returns at the expense of investment could damage the performance of the economy in the future.
Michael Kastner, managing principal at Halyard Asset Management, said while companies were bolstering buybacks and dividends, he was noticing far more insiders selling.
“As an investor I don’t like seeing senior management selling shares while the company is buying back the stock. That is not necessarily a good sign.”
With the S&P 500 approaching its record peak from March, the rising tide of buybacks shows little sign of easing, said Mr Kastner.
“CEO’s are being rewarded for buybacks, and as share prices go up it becomes a virtuous cycle,” he said.
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