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WSJ: $17.2B Drop in Share Buybacks Hinders Stock Market

WSJ: $17.2B Drop in Share Buybacks Hinders Stock Market
(Lkeskinen/Dreamstime)

By    |   Friday, 05 July 2019 07:51 AM

Share repurchases by companies recently contracted for the first time in seven quarters, The Wall Street Journal reported.

The strategy removes a pillar of support from the stock market as executives contend with the consequences of trade tensions and slowing economic growth.

WSJ.com said 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,” the Journal explained.

“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.”

Fewer stock buyers will sap some of the market’s liquidity, making volatile stretches more punishing if investors dump their shares. 

“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.”

However, the nation's largest banks are rewarding shareholders by spending tens of billions raising their dividends and buying back stock after getting the green light from the Federal Reserve, the Associated Press reported.

The Fed last week said it had approved the capital plans the nation's 18 largest banks submitted as part of this year's stress tests. That means it determined the banks could raise their dividends and buy back more shares this year and still have enough capital to survive a hypothetical deep recession in the next year.

Immediately after the Fed's announcement, the major banks started unveiling their plans.

JPMorgan, the nation's largest bank by assets, said it plans to buy back $29.4 billion in shares this cycle. It would also increase its dividend 12.5% to 90 cents a share. In total, JPMorgan would return roughly $40 billion to shareholders through dividends and stock repurchases over the next year.

Wells Fargo announced plans to buy back $23.1 billion in stock the next year and increase its dividend 13.3% to 51 cents a share. The bank remains under investigation by state and federal authorities for abusive banking practices.

Citigroup said it would buy back $17.1 billion in stock next year and also plans to increase its dividend to 13.3% to 51 cents a share.

In total, the Fed expects the nation's 18 biggest banks to return more than 100% of their expected earnings to shareholders this annual cycle. In another way of putting it, these banks collectively are expected to spend more in dividends and stock repurchases than they expect to make in profit this year.

The central bank's stress tests were mandated after the Great Recession under the Dodd Frank Act. They are designed to test whether a large bank could survive a sudden economic downturn without imploding, as was the case a decade ago.

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Share repurchases by companies recently contracted for the first time in seven quarters, The Wall Street Journal reported.
share, buyback, stock, market
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2019-51-05
Friday, 05 July 2019 07:51 AM
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