Buybacks of US companies are on the rise, raising investor hopes

NEW YORK (Reuters) – U.S. corporate stock buyback levels are slowly rising following the drop in spending caused by last year’s pandemic and investors are eager to see how much the buybacks could support market gains.

Buybacks not likely to return to pre-pandemic levels this year, but recent buyback talk from Companies have raised investor hopes that buyback trends have turned the corner, thanks to optimism about introducing vaccines to fight COVID-19.

Last week Netflix said it would be exploring the return of excess cash to shareholders via share buybacks and investors cheered on recent buyback announcements. from some large investment banks.

“Companies are starting to get back on the water,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “This is a good sign, … it means that cash flow is available.”

S&P Dow Jones Indices plans to buy back shares for S&P 500 companies totaling approximately $ 116 billion in last year’s fourth quarter, up from $ 102 billion in the third quarter.

It is still far below $ 182 billion in Q4 2019 and a record $ 223 billion in Q4 2018. Buybacks of the S&P 500 are expected to rise to $ 651 billion in 2021 from about $ 505 billion last year, based on S&P data.

Looking at the buyback announcements from US-listed companies, TrimTabs Research said US companies turned more bullish towards the end of last year and buyback announcements reached a 15-month high of $ 88.4 billion in December.

Share buybacks of the S&P 500 peaked at $ 806 billion in 2018, according to S&P, as massive tax breaks for US companies boosted liquidity levels.

Share buybacks are often cited as a key support for US equities, and investors are evaluating the potential for support with US equities already at all-time highs this year. Buybacks reduce the number of shares in a company outstanding, increasing earnings per share and lowering the price-to-earnings ratio, a key benchmark.

“Since the market is as expensive as it looks, stock buybacks could push it much higher,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut.

“It adds to Street’s belief that there is an underlying offering, we’re not alone in that, and someone else will back the stock and that’s the company,” he said. “It turns out to be a good thing for stock prices. But they run the risk of overvaluing stocks, and that speaks to the wider question of why companies are doing it. “

In the 2021 outlook of his company, David Joy, chief market strategist at Ameriprise Financial, said that the company’s base scenario is that corporate share buybacks will gradually increase until 2021, while a more favorable scenario would be that buybacks. accelerate back to pre-pandemic levels. “

Banks in particular have been in the spotlight.

Following the Federal Reserve’s second bank stress test for 2020 – which measures banks’ financial health and determines whether they have sufficient reserves to protect themselves from losses – the Fed eased buyback restrictions in December. This was quickly followed by announcements from some large companies, including JPMorgan Chase and Goldman Sachs, who plan to buy back shares starting in 2021.

JPMorgan’s board of directors has authorized a $ 30 billion share buyback program.

The S&P 500 Buyback Index has tripled in value since the end of the global financial crisis and its rebound from the pandemic recession was as sudden as its collapse.

Graph: SP and GDP buyback index –

Silverblatt said not all sectors will be ready to increase buybacks at this point, particularly hotels, entertainment and other sectors that have been particularly affected by the pandemic.

Reporting by Caroline Valetkevitch; Additional reporting by Stephen Culp; Editing by Alden Bentley and Leslie Adler