U.S. companies bought back a record $1 trillion in stocks in 2018, and that pace of share repurchases has only accelerated in the first weeks of this year, investors and analysts told MarketWatch.
Sixty companies in the Russell 3000
announced buybacks worth a total $106 billion in January, nearly doubling the 43 announcements totaling $67 billion in buybacks announced in January of last year, according to Michael Schoonover, chief operating officer at Catalyst Capital Advisors and portfolio manager of the firmâs buyback-focused fund.
This acceleration in the pace of share repurchases is occurring even as the practice is coming under greater scrutiny by Washington lawmakers, with Senators Bernie Sanders, an Independent, and Chuck Schumer, a Democrat, introducing legislation this week that would ban the practice unless a firm âinvests in workers and communities first.â Their bill calls for requiring a company-wide wage floor of $15 per hour and providing sick leave, among other requirements.
Some market observers had predicted the buyback trend to wane in 2019 because last year companies were given the one-time option to repatriate funds they held overseas at a greatly reduced tax rate, which theoretically incentivized companies to return a large portion of the more than $4 trillion U.S. companies held at overseas subsidiaries.
However, repatriation ended up not being as important of a force for the record magnitude of buybacks last year, in part because companies brought back less funds than expected, but also because the money firms saved from the recent corporate-income tax cut provided more than enough fuel, Schoonover said.
âThese lower tax rates are permanent, and thereâs only so much that can be done with that money,â he added. âThat excess income is eventually going to be returned to shareholders in the form of buybacks.â
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, concurred. âWeâve been monitoring what companies have been saying about their cash deployment strategies. So far, weâve found more companies are emphasizing increased use of buybacksâ¦than those that say theyâre scaling it back,â she wrote in a research note.
By Calvasinaâs count, more than twice as many companies have indicated plans to expand buybacks as those that have said they will service outstanding loans or deploy cash for acquisitions. Eight times as many companies said they expect to ramp up buybacks as those that said they were decreasing or demphasizing buybacks, she said.
Mislav Matejka, head of global equity strategy at JPMorgan Chase & Co., wrote in a recent research note that buybacks are affordable for companies, given increases in earnings for S&P 500
constituents last year. âThe ratio of buyback to EBIT [earnings before interest and taxes] doesnât look particularly stretched,â he wrote.
Meanwhile, slower projected earnings expansion this year will increase the importance of share repurchases in determining increases in earnings-per-share, or EPS. According to a recent Bank of America Merrill Lynch analysis, analysts predict buybacks will contribute 1.5 percentage points to EPS growth this year, up from the one 1 percentage point averaged in the recent past.
âBuybacks have and will be a clear tailwind for earnings-per-share growth,â Kevin Divney, senior portfolio manager with Russell Investments, told MarketWatch.
âWe prefer companies to invest in capital expenditures and future growth, but if management canât get a good return on the windfall from lower tax rates, buybacks are a great way to return money to shareholders.â