Some companies are easing up on share repurchases this year, potentially removing a pillar of support from the stock market as executives contend with the consequences of trade tensions and slowing economic growth.
Share repurchases contracted for the first time in seven quarters, with S&P 500 companies spending $205.8 billion to buy back stock in the first three months of the year, according to the latest S&P Dow Jones Indices data. While still robust, that is down from a record $223 billion in the fourth quarter, and analysts say the contraction could continue as companies show signs of tightening their purse strings.
Buybacks have been one of the biggest sources of equity demand throughout much of the bull-market run, analysts say, with companies spending more than $800 billion last year alone on share repurchases—the most ever in a single year.
Companies and investors often applaud share repurchases because they juice per-share earnings and can boost stock prices. But some skeptics contend buybacks add little value, only serving to prop up the stock market when valuations are relatively stretched and corporate earnings are weakening.
Those concerns surfaced last year, as some analysts argued that buyback spending shortchanged U.S. economic growth and would have been better spent on long-term investment projects, such as building new factories or on research. Some politicians in recent months have even proposed restricting how much stock companies can buy.
But the decrease in buybacks could present a new problem for investors, analysts said. Fewer stock buyers will sap some of the market’s liquidity, making volatile stretches more punishing if investors dump their shares. Last October offered investors a preview of this, when volatility triggered by the Federal Reserve’s pace of interest-rate hikes coincided with a buyback blackout period ahead of corporate earnings. The S&P 500 fell nearly 7% that month before tumbling even deeper in December.
“Buybacks have been a critical element in why the stock market has gone up,” said Torsten Slok, chief economist at Deutsche Bank Securities. “But the economy is slowing, and we’re all trying to figure out how much. That simply means there are going to be [fewer] funds available to do buybacks.”
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As of late Monday, the S&P 500 was up 18%, but a big chunk of that—13.1%—came in the first quarter of the year. Stocks have mostly drifted higher since then, as investors contended with trade anxieties, which resurfaced in May, and sluggish economic data, from slowing manufacturing activity to a steep pullback in hiring. This suggests that growth may have peaked in the U.S. last year following a massive tax overhaul that benefited corporate coffers.
On top of that, corporate earnings are expected to weaken further, potentially leading companies to pull back their spending, analysts said. S&P 500 companies are projected to report earnings falling an average of 2.6% in the second quarter from a year earlier and 0.5% in the third quarter, according to FactSet. If those numbers hold up, the earnings throughout the broad index will have fallen three straight quarters, its longest losing streak since 2016.
Initial spending data through the first quarter of this year suggests companies are already tapping the brakes. A measure of business spending—fixed nonresidential investment—rose 4.4%, less than half the rate from a year earlier and below the 5.4% growth in the fourth quarter, according to the Commerce Department. Dividends, another way companies return capital to shareholders, also declined 2.1% from the fourth quarter to $117.3 billion, S&P said.
Industrial companies and those focused on consumer-discretionary products were among those that pared back their spending on share buybacks in the first three months of the year, as trade tensions and possible supply-chain disruptions likely weighed on executives’ decisions.
“There’s greater uncertainty facing executives and pressure is building on the market with those tariffs in place,” said Vincent Deluard, head of global macro strategy at INTL FCStone. “There’s a general pattern of slowing earnings for the S&P 500 and that’s going to have a material impact on buybacks and the stock market.”
Industrial companies in the S&P 500 spent $19.4 billion on buybacks earlier this year, down from $23 billion in the fourth quarter, while consumer discretionary companies spent $17.7 billion through the first three months of the year, down from $25.7 billion at the end of 2018, according to S&P’s data. Communication, financial, real estate and energy companies also trimmed their buyback spending.
Technology firms, meanwhile, increased their spending on buybacks, totaling nearly $68 billion in the first quarter. Apple Inc., the biggest share re-purchaser last year, led the S&P 500 in buybacks in the first quarter, spending $23.8 billion, followed by $10 billion from Oracle Corp.
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While not immune to trade tensions, shares of tech companies have benefited from expectations that the Federal Reserve will eventually cut interest rates, a move that would make stocks more attractive to investors who are looking to beat the lowered returns offered by relatively safe investments.
But while technology firms have taken more of a leading role with buybacks over the years, analysts say the market can’t count on them to make up for shortfalls elsewhere, such as among consumer discretionary stocks and industrials. That, coupled with a prolonged bout of volatility, could carry serious consequences, said Diane Jaffee, a senior portfolio manager at TCW Group Inc.
“There’s going to be less liquidity in the stock market,” said Ms. Jaffee. “Any bad news and that can send other shareholders out the door.”
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Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
https://www.wsj.com/articles/decline-in-share-buybacks-deals-blow-to-stock-market-11562063438
2019-07-02 12:39:00Z
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