It’s out with the new and the old, at least when it comes to market themes.
In the halcyon days before Covid-19, companies happily spent their free cash flow on share buybacks. And why not? The cost of capital was low and opportunities seemed scarce. That should have changed in a post-coronavirus world. But now that 10-year yields have fallen back below 1.3% and ‘peak growth’ is all the rage, it might not be such a bad idea to spend cash on share buybacks.
At least that seems to be what companies seem to think. According to data from JP Morgan, repurchase announcements have already reached $431 billion this year, surpassing the total of $307 billion in 2020. That number should continue to grow and set the previous record of $1 trillion on a rolling basis of $1 trillion going forward. 12 months, according to JP Morgan strategist Dubravko Lakos-Bujas.
Historically, tech companies and banks have made the bulk of buybacks, and
(ticker: AAPL) and
bank of America
(BAC), with $90 billion and $25 billion in repurchases announced, respectively, will ensure that doesn’t change. Yet
(GOOGL) Announcing a $50 billion buyback in April means that communications services should also provide a major boost.
All told, S&P 500 companies could repurchase $875 billion of their shares over the next year, while paying another $575 billion in dividends, giving investors an expected shareholder return of 3.9%. “This is significant support for equity valuation at a time when 10-year US bonds are yielding 1.2%,” writes Lakos-Bujas.
It’s not just returns that make stock buybacks attractive, writes Christopher Harvey, US equity strategist at Wells Fargo Securities. Borrowing money is almost as cheap for many S&P 500 companies as it is for the US government – the difference between high-quality corporate bonds and equivalent government bonds is less than one percentage point— while the US economy continues to grow at a solid pace. What’s the best way to take advantage of the situation? “For companies, the answer is clear to us,” Harvey says. “Spend debt and buy back stocks or other companies.”
Harvey screened for companies that actively bought shares in 2018 and 2019, saw a large decline in buyback activity in 2020, and have large cash balances to find companies that could start buying backs. Many of them have lower valuations and greater exposure to reopening — a good thing, Harvey says — than their peers in the S&P 500. Some we’ve picked before in this space, including
Discover financial services
(DFS). Other stocks that made Harvey’s list include:
Write to Ben Levisohn at Ben.Levisohn@barrons.com