Buybacks set for a record year, but who are they helping?


Redemptions are increasing. After cratering in the first half of 2020, buybacks have increased for six consecutive quarters and are ready for a record year.

S&P 500 share buybacks:
Q1 20: $ 199 billion
Q2 20: $ 89 billion
Q3 20: $ 102 billion
Q4 20: $ 131 billion
Q1 21: $ 178 billion
Q2 21: $ 199 billion
Q3 21: $ 234.6 billion
Q4 21 (est.) $ 238 billion
Source: S&P Dow Jones Indices

At nearly $ 850 billion, the total volume of buybacks for 2021 would surpass the record of $ 806 billion seen in 2018.

Fueling the Rise: Finance and Technology

Most of the buyouts are concentrated in a small group of companies. The top five accounted for nearly 30% of third quarter buybacks. Four of the five are technology companies.

Redemption of monsters
(largest buybacks, Q3 2021)

Apple $ 20.4 billion
Meta-platforms $ 15 billion
Alphabet $ 12.6 billion
Bank of America $ 9.9 billion
Oracle $ 8.8 billion
Source: S&P Dow Jones Indices

Why are buyouts so concentrated in tech companies? These are the companies that have the highest cash flows, which allows them to buy back shares.

Financials made a comeback this year on the buyback list because many returned excess capital. American Express and Morgan Stanley also made major buyouts this year.

Do redemptions benefit the investor?

Buybacks that do not also reduce the number of shares do not benefit investors because it is the reduced number of shares that improves earnings per share, which investors want.

But many companies are announcing buybacks even as they offer new options to executives and other employees, which doesn’t reduce the number of shares. These officers and employees exercise these options.

It is like emptying a swimming pool (buying back stock) and filling it at the same time with a pipe (creating new stock thanks to the options).

The result, often, is a wash. The total number of stocks in the S&P 500 is slightly higher today than it was in 2018.

S&P 500: outstanding shares
2018 $ 300 billion
2019 $ 296 billion
2020 $ 312 billion
2021 (year to date) $ 306 billion
Source: S&P Dow Jones Indices

There is an additional reason why buybacks do not generate a reduction in the number of shares despite record amounts: Buybacks are executed in dollars, not repurchased shares, but the S&P 500 is up almost 50%. since the end of 2019.

“The impact on the number of shares remains significantly lower compared to previous years, as rising stock prices have reduced the number of shares that companies can buy back with their current spending,” said Howard Silverblatt, who monitors buybacks as lead index analyst for S&P Dow Jones Indices. in a recent note to clients.

The bottom line, according to Silverblatt: “The number of shares has increased, despite the fact that more than $ 2 trillion has been spent on buybacks since the end of 2018.”

Here are the companies that are really reducing the number of their shares

Some companies are actually reducing their stock numbers with the help of buybacks and have drastically improved their earnings per share, including some of the bigger tech companies.

Redemption of monsters
(reduction in the number of shares since 2018)

Apple 19%
Alphabet 9%
Facebook 1%
Oracle 35%
Microsoft 3%

2022: another record year?

As consumption remains strong and corporate profits are expected to rise by at least 10% in 2022, buyout watchers see the potential for another record year in 2022.

“The record buyout pace seen in the second half of 2021 will likely continue into 2022 as US companies find their balance sheets filled with cash as the new year dawns,” Ben Silverman, research director at InsiderScore, told me.

SIlverblatt agrees, but with a caveat: “Companies should increase spending, which is necessary for higher priced stocks, but not enough to impact stock counts. “

Should we tax redemptions?

The huge sums spent on buyouts have fueled outrage in Washington, where many have long complained that buyouts don’t do much but enrich management.

President Joe Biden’s Build Back Better plan proposes a 1% excise tax on buybacks. The new tax is expected to generate $ 124 billion in revenue over 10 years, but negotiations are currently stalled.

the Tax Policy Center argued that buyouts reduce the tax burden on corporations because they allow greater deferral of capital gains. “Since share repurchases avoid taxation at the investor level, the repurchase tax is a reasonable way to reduce the tax advantage,” the center said.


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