Shifting Trends in Share Buybacks

Company share repurchases (or buybacks) have been popular over the past several years, and for good reason. Profits in aggregate rose for several years (before COVID-19) and interest rates have been, and continue to be very low. The share buyback trend has shifted recently, however, as profits have declined and uncertainty has risen.

Companies repurchase shares for a variety of reasons. Commonly shares are bought back because the stock price is viewed as undervalued or that no better investment opportunities exist for the company’s cash. When a company earns a profit, they can either retain the profit or distribute it to shareholders, often through a dividend or a share repurchase. When a repurchase occurs, the company uses its cash to purchase its own shares, thereby reducing the number of shares outstanding. This means the remaining shareholders now own a larger percentage of the company.

According to S&P Dow Jones Indices, buybacks for companies within the S&P 500 totaled $89.7B in Q2, down 46% compared to a year ago. As you can imagine, when profits decline or when the future is uncertain, companies may elect hold onto their cash.

In addition to changes in buybacks, company dividend policies have been changing as well in this environment. The percent of S&P 500 companies increasing their dividend has changed from 68% pre-COVID to 53% (source: Ned Davis Research). It is not surprising to see this decline given the pandemic-induced recession this year.

What does this all mean? Companies are adapting to the current environment, appropriately making decisions for an uncertain future.

Market Comments

• U.S. stock markets were relatively unchanged for the week as the S&P 500 briefly set a new all-time high 

  • International stocks were down on the week however a weakening U.S. dollar helped mute some of the decline

• The U.S. stock market reached all-time highs this week, increasing approximately 55% from the lows set late March

  • The five largest stocks in the S&P 500 - Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google (GOOGL) and Facebook (FB) - which make up more than 20% of the index (the biggest weighting for the top five since at least 1980), accounted for a quarter of the rally since the 23-Mar low. The average gain for the group during that time has been nearly 72% (vs 55% for S&P 500), with Apple the standout, up over 100%.

• Several large retailers reported strong earnings for Q2, including; Walmart, Home Depot, Advance Auto Parts, and Target

  • MN-based retailer Target reported strong Q2 earnings, reporting a record 24.3% comp increase in Q2 with stores up 10.9% and digital up 195%. CEO said growth slowed from 20%+ in June and July to low-to-mid-teens in August.

• On Wednesday the Fed releases the highly anticipated minutes of its July meeting. The July FOMC minutes provided little detail on the timing of Fed policy completion (still expected in September) but showed further discussion of some outcome- or calendar-based forward guidance.

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