Surging US share buybacks offer support to sputtering market

NEW YORK (BLOOMBERG) - United States companies are stepping up share buybacks, supporting a struggling stock market in the face of mounting geopolitical tension and fears that earnings growth will wane once the US Federal Reserve raises interest rates.

The 10 biggest repurchases for S&P 500 Index companies in the last quarter totalled US$86 billion (S$115.7 billion), up almost 30 per cent from a year earlier, led by Apple, Meta Platforms and Google parent Alphabet, data compiled by Bloomberg show.

The list is not complete, with nearly 20 per cent of index members scheduled to report data in the coming weeks.

Buybacks are surging as companies tap cash hoards amassed during the Covid-19 pandemic. While some investors argue the funds are better spent on the businesses, many cheer the efforts to boost per-share earnings and potentially stock prices.

The trend is expected to continue this year, providing a market tailwind with stocks sputtering below all-time highs.

"Buybacks are back," said ClearBridge Investments investment strategy analyst Josh Jamner. "In this period of market volatility, companies do have dry powder that they should be able to deploy."

Many companies suspended dividends and buybacks during the pandemic to bolster balance sheets, and then seized on historically low interest rates to borrow and boost reserves. Now they are using that cash to appease shareholders, who are pressuring executives to improve their stock prices.

The S&P 500 has lost 8.8 per cent to start 2022.

Most of last quarter's buybacks were concentrated in a small group of companies. The technology and communication services sectors, which typically have the biggest cash flows, are leading the way.

Major banks, which ratcheted up repurchases in the last year, will likely join the top spenders when they publish their numbers in the coming weeks.

S&P 500 firms are expected to have bought back at least US$265 billion in stock in the fourth quarter. That exceeds the third quarter's all-time high of about US$235 billion, according to data from S&P Dow Jones Indexes, which uses a different methodology than Bloomberg.

"Buybacks are important since they're adding support for the market," said S&P Dow Jones Indexes senior index analyst Howard Silverblatt. "It still looks like it'll be another strong year for buybacks, particularly in the first quarter."

All told, buybacks may exceed US$870 billion for last year, according to Mr Silverblatt's data. That would eclipse the record of US$806 billion from three years earlier, when companies used repatriated funds from the federal tax overhaul.

While this is helping stocks, the impact may be diminished because high valuations mean the purchases are hoovering up fewer shares, Mr Silverblatt said. In addition, the expenditures are not necessarily so large when measured against the companies' earnings and market values, he says.

Still, buybacks show no sign of slowing. Walmart just announced plans to spend at least US$10 billion on repurchases in fiscal 2023, while Twitter unveiled a US$4 billion program and Exxon Mobil said it will accelerate a US$10 billion plan. For some companies, the timing has not been great. Meta, formerly Facebook, spent around US$20 billion on stock repurchases in the fourth quarter, when its shares were above US$300. Then it saw about US$251 billion of market value erased on Feb 3, the biggest wipeout for any US company ever, following disappointing earnings. It closed Friday at US$206.16.

But the beat goes on. Alphabet authorised a US$50 billion repurchase programme last year, and then this month announced a 20-to-1 stock split, a sign management is becoming more shareholder-friendly, analysts said.

"The most important thing is the health of the company, and corporations are still in a very strong financial position with near-record cash balances," ClearBridge's Mr Jamner said. "So we'll likely continue to see greater return of capital to shareholders."