Big companies across America spent less on their own shares for a second quarter in a row, threatening a key pillar of support for the stock market that has helped to push indices to record highs.
US-listed groups spent $166bn on stock buybacks in the second quarter, down from $205bn in the first quarter and $190bn for the same period a year earlier, according to data from S&P Global.
The reduction in share buybacks comes after a bumper 2018 when the Trump administration’s tax reform freed up cash for companies to spend a record $806bn on their own shares. This year, buyback activity is likely to drop to $798bn, based on S&P Global estimates.
“Across the board the rank and file have cut back,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. “The high of all that junk food in the form of tax cuts may have pushed US companies to overspend on buybacks last year.”
The tapering of buybacks comes as management teams grow more anxious about the outlook for growth, and as investors show new wariness towards risky assets such as stocks. The renewed one-upmanship between the US and China over tariffs, along with weaker economic data around the world, have nudged investors into safer assets such as government bonds.
“We’re in a period of uncertainty with trade tariff negotiations and global growth concerns so you can’t blame CFOs for being more cautious,” said Lew Piantedosi, director of growth equities for Eaton Vance. “It’s hard for management teams to know what the rules of the game will be.”
Apple and Cisco were among the biggest of US companies cutting spending on buybacks in the second quarter, S&P data showed. The iPhone maker spent $17bn for the period compared with $23bn in the first three months of the year, while Cisco bought $4.5bn of its own stock in the second quarter, down from $6bn in the first.
Stock buybacks are neutral, in theory, for a company’s value — every dollar handed back to shareholders is a dollar less in equity — but a reduction in the number of a company’s shares outstanding increases earnings per share and boosts pay for managers with EPS-linked plans. Many companies also prefer the flexibility of a buyback programme, which can be cut or scrapped altogether, over a commitment to keep raising a dividend. Investors, too, often find buybacks more tax-efficient than dividends.
The contraction in buyback activity should not worry investors unduly because US companies are still investing in their businesses through capital expenditure and research and development, said Eileen Riley, a portfolio manager with Loomis Sayles. “I don’t think you should look at share repurchases in isolation,” said Ms Riley. “When you look at companies’ capital allocation decisions in aggregate, we are not seeing spending on R&D and capex change dramatically.”
Record high prices for US stocks reached this year also means companies were less likely to opportunistically hoover up their own stock based on short-term dips in valuation. The S&P 500 is currently trading at 3.2 times its book value, close to its biggest premium over the rest of the world’s developed markets since the dotcom bubble of 2001.
“I’m all for companies showing a note of confidence by buying their stock but you don’t want them using that capital to buy back overvalued stock,” said Mr Piantedosi.
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