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Stock Buybacks Fall Most Since 2009, Damping Key Source of Market Support

Stock Buybacks Fall Most Since 2009, Damping Key Source of Market Support

Monday, 16 May 2016 04:04 PM

Corporate America has its eye on a new target as executives look to tighten their belts amid a slump in profits — and this time shareholders won’t like it.

After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show.

Coming amid the worst profit slump since the financial crisis, the slowdown may signal companies are preserving cash as economic and political uncertainty whips up from Europe to China and in the U.S. At stake is the primary source of buoyancy for the second-longest bull market in history, at a time when individuals and money managers are bailing out and valuations sit near 14-year highs.

“If the only meaningful source of demand in the market is companies buying their own shares back, then what happens if that goes away?” said Brad McMillan, chief investment officer of Commonwealth Financial Network in Waltham, Massachusetts, which oversees $100 billion. “We should be concerned.”

Repurchases aren’t the only thing companies are cutting. As profits fell for a fourth straight quarter, the number of firms slashing dividends rose to a seven-year high. Executives are scaling back after handing out sums of cash that exceeded their earnings, an act that has drawn criticism from politicians. Presidential candidate Hillary Clinton said in July that companies’ focus on share prices is hurting the economy because it lowers investment.

In the first quarter, capital spending dropped 5.9 percent, the most since 2009.

Planned buybacks among American firms tumbled from a year ago by $147 billion, an amount equal to 2.5 times the profit S&P 500 companies lost in the 12 months through March. To be sure, large banks such as Citigroup Inc. and Morgan Stanley, whose capital plans are awaiting Federal Reserve approval, were among the missing, and their programs may restart later in 2016. Stress test results are due before the end of June.

Stay Elevated

The likelihood that companies will increase spending as the year progresses was highlighted in a May 12 note from David Kostin, the chief equity strategist for Goldman Sachs Group Inc., who predicted that repurchases will increase 7 percent in 2016 and remain the primary source of U.S. stock demand.

The first-quarter slowdown was mostly executives responding to the economic and credit stress earlier in the year, according to Joseph Amato, chief investment officer of equities at Neuberger Berman LLC in New York, where the firm oversees $243 billion. As the fear subsides, buybacks are likely to stay elevated, he said.

“The scare in the first quarter was overblown,” Amato said. “The economy is growing on the global basis at a reasonable level. That, in our mind, would suggest that companies will come back and have a typical buyback program consistent with levels of the last few years.”

Corporate Outlook

Announced buybacks are blueprints that cover strategies for two or three years and hence loosely correlate to the amount of repurchases that are executed, with actual buying equaling 81 percent of authorized since 1985. Should the ratio hold and the pace of announced buybacks keep through December, repurchases would fall below $600 billion for the first time in three years. Buybacks hit a record $762 billion in 2007.

“Pulling back on buybacks is company management telling us they are either not optimistic or more pessimistic than they were in the past and they’re doing it through their actions,” said Joseph Veranth, chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin, which manages $7 billion. “It may be a harbinger of a weaker outlook on behalf of management for company prospects going forward.”

Companies are easing up at a time when the potency of buybacks is waning. After beating the market by at annualized pace of 3.5 percentage points in the four years through March 2015, the S&P 500 Buyback Index that tracks stocks with the highest payout ratio has since trailed the broad measure by almost 10 percentage points. The S&P 500 rose 0.3 percent as of 9:40 a.m. in New York after three weeks of declines, the longest losing streak since January.

Cash Hoarding

A doubling in profit since 2009 and a borrowing binge fueled by rock-bottom interest rates have allowed U.S. executives to hoard cash. Even with profits in a year-long decline, there’s no evidence companies are running out of money. The extra yield demanded to own corporate bonds versus Treasuries this month has fallen to levels not seen since August. While it’s down 5 percent from the end of last year, cash held by S&P 500 companies excluding financial firms exceeds $860 billion, according to latest corporate filings compiled by Bloomberg.

Still, a weakening in corporate demand could tilt the market’s supply and demand balance in favor of bears. U.S. firms have been the biggest buyer of stocks every year since 2009, with their net purchases exceeding $2 trillion, Federal Reserve data on fund flows compiled by Goldman Sachs show.

Their role in keeping the bull market afloat is more pronounced this year. According to Bank of America Corp., the firm’s trading clients from hedge funds to wealthy individuals were net seller of stocks for 15 straight weeks through May 6, a record streak. The only buyer was corporations scooping up their own shares.

“Companies have been a fairly consistent buyer that has supported the late stage of this bull market,” Channing Smith, a managing director at Capital Advisors Inc. in Tulsa, Oklahoma, said by phone. The firm oversees about $1.6 billion. Their potential retreat means “there is less firepower to counter any type of bout of selling,” he said.

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Corporate America has its eye on a new target as executives look to tighten their belts amid a slump in profits -- and this time shareholders won't like it.
stock, buyback, market, demand
Monday, 16 May 2016 04:04 PM
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