- Corporate share repurchases are happening at a torrid, record-setting pace, and they’re showing no signs of slowing.
- Goldman Sachs, however, argues their efficacy is waning and companies should be considering alternative ways to spend their cash.
Welcome to 2018, the year of the buyback.
That’s right, the amount of share repurchases executed by S&P 500 companies is expected to hit $650 billion this year, which would shatter the record set in 2007 and mark a 25% year-over-year increase, according to Goldman Sachs data. The same goes for announced buybacks, which are expected to swell to $900 billion, also an all-time high.
And repurchases only seem to be accelerating at this point, with Bank of America Merrill Lynch corporate clients having just set a weekly record for buybacks.
On the surface, this would appear to portend bright things ahead for the equity market. By reducing the number of shares outstanding on a stock, buybacks are naturally accretive for shares. That’s one big reason they’ve been used as a safety net for stocks throughout the nine-year bull market, providing much-needed share appreciation during periods devoid of other positive catalysts.
But Goldman sees a different scenario playing out — one in which the efficacy of buybacks is dwindling, throwing into jeopardy one of the stock market’s most reliable support beams.
The firm sees this playing out through an index it maintains that is designed to measure the performance of the 100 S&P 500 stocks most active on the buyback front. If investors were rewarding company buybacks by investing in the companies and pushing their stocks even higher, Goldman says its index would be performing better relative to the benchmark.
“The lackluster performance of popular buyback benchmarks suggests that investor scrutiny of share repurchases may be rising,” Jessica Binder Graham, an analyst at Goldman, wrote in a client note. “After peaking in early 2015, performance of the S&P Buyback Index has been flattish / choppy relative to the S&P 500.”
To further assess the future of buybacks, it’s important to consider the source of the record fervor: the GOP tax law. With billions upon billions of dollars becoming newly available to US companies, they’re apparently using a great deal of it for repurchases.
If the effectiveness of buybacks lessens further, companies may start using their excess capital for other activities, such as reinvesting in capital expenditures to grow their businesses. It may not provide the immediate dopamine rush that a buyback announcement might, but it’s better for the long term.
And in the end, that’s what Wall Street really wants anyway.