Boards of companies listed on the S&P 500 index have authorised $146bn in share buybacks this year, marking the lowest pace in five years, with directors worried about “extremely high valuations,” according to research by Goldman Sachs.
The figure represents a decline of 15 per cent from the comparable period last year, the New York investment bank’s equities team said. Meanwhile, share buyback executions are down 20 per cent from the year-ago period.
Buybacks have been a popular tool companies, awash with cash and keen to leverage low interest rates, have used to keep investors happy and lift earnings per share. Indeed, gross S&P 500 buybacks almost doubled from 2010 to 2015, to $564bn from $290bn, according to Goldman’s analysis.
But now, Goldman reckons that the “infatuation with buybacks has ended for both companies and investors”.
High valuations are probably playing a role in pushing more boards to the sidelines. Goldman notes that the median S&P 500 stock trades in the 98th percentile of the historical valuation range across numerous metrics (the index’s forward 12-month price to earnings multiple is running near multi-year highs).
“Experience shows that firms repurchasing shares at extremely high valuations regret those actions when the stock price inevitably de-rates,” Goldman said.
A key linchpin this year will be tax reform — particularly whether US groups will be able to repatriate trillions of dollars in overseas cash, some of which would go to buybacks.
With the enactment of tax reform measures seen as increasingly pushed back to 2018, Goldman has sharply trimmed its forecast for buyback growth this year to just 2 per cent, from 30 per cent previously.