US corporate boardrooms’ approval of share buyback plans has fallen to its lowest level since 2012, signalling that the stock market’s surge to further highs this year is curbing a key source of demand for equities.
Companies on the S&P 500 index have authorised $146bn in share buybacks this year, down 15 per cent from a year ago, according to data from Goldman Sachs. Executives have also been reluctant to pull the trigger on already-approved plans, with buyback executions 20 per cent lower in 2017 compared with last year.
Buybacks have been a vital pillar for the almost decade-long bull market on Wall Street as companies — awash with cash and keen to take advantage of low interest rates — have used them to lift earnings per share and burnish the appeal of their shares. US buybacks have totalled more than $2tn over the past five years, according to Absolute Strategy Research, a research boutique.
This year’s decline comes after a 6.3 per cent drop in corporate stock repurchases last year, according to data from S&P Dow Jones Indices, but runs counter to widespread hopes that 2017 would result in a sharp rebound.
However, the “infatuation with buybacks has ended for both companies and investors”, said David Kostin, Goldman’s head US equities strategist, noting that companies with big stock repurchasing programmes have underperformed lately.
The market rally, which has left stocks trading at a higher ratio versus their earnings, is reducing the appeal of buybacks to companies’ boards, Mr Kostin said, adding that “experience shows that firms repurchasing shares at extremely high valuations regret those actions”.
David Lebovitz, a strategist with JPMorgan Asset Management, said the ebbing in buyback activity marked a “healthy shift away from financial engineering”, which has dominated the bull market run since the financial crisis. While buybacks have bolstered earnings per share figures, it has masked lacklustre growth.
In a sign of the rising multiples that shares are trading on, the S&P 500’s forward 12-month price-to-earnings ratio sat at 17.6-times on Monday, near the highest level since 2004, according to FactSet data. The median company in the US blue-chip equity gauge is trading at the 98th percentile of historical valuations, Mr Kostin noted.
Analysts and investors say whether buybacks pick up will depend on Donald Trump’s ability to pass tax reform — particularly whether US groups will be able to repatriate trillions of dollars in overseas cash that would provide a further source of funds to use on buying-back stock.
Goldman, for instance, initially expected a 30 per cent surge in buybacks this year, mostly due to companies spending some $150bn of repatriated funds on the practice. But the New York investment bank has since sliced its estimate to a rise of only 2 per cent, given growing expectations that tax reform measures are unlikely to be enacted before late-2017 or early next year.
“I’m not sure this is an ominous sign,” Mr Lebovitz of JPMorgan added. “It says that stocks look pricey and companies have figured out that there are better uses of their cash, which stems from a brighter outlook.”