Over the past decade, the expenditure of US companies on stock repurchases has always been one of the important driving forces for the rise of US stocks. However, facing the expectation of the Federal Reserve maintaining high interest rates for a longer period of time and the uncertain economic background, this expenditure is also slowing down.
According to Bank of America Corp., the size of US stock repurchases fell by another 3% in the third quarter after a 26% year-on-year decline in the second quarter of this year. The buybacks in this financial reporting season mainly come from industries known for high shareholder returns, such as the energy industry, where Chevron and Total have both increased their buyback scale. But the banking industry is more cautious. Citigroup recently stated that it expects only moderate stock repurchases in the fourth quarter.
And just last year, companies in the S&P 500 index spent a record $923 billion to repurchase stocks, continuing the trend after the 2008 global financial crisis. After the financial crisis, US interest rates remained near zero for ten consecutive years, driving a wave of stock buybacks. This approach has been repeatedly attacked by politicians and scholars, who believe that companies should invest excess cash in areas that can promote long-term growth, but buybacks are attractive to investors because they mean that company profits are divided among fewer stocks, thereby improving indicators such as earnings per share.
But now, as the Federal Reserve continues to raise interest rates to manage inflation, Bank of America has stated that tightening credit conditions and increasing financing costs mean there are risks to repurchase. Bank of America strategist Savita Subramanian said, "Repurchase is a phenomenon after the global financial crisis, where companies use cheap financing costs to buy back their own stocks. However, with the end of the ultra loose monetary environment, repurchase behavior is now at risk." This is because, except for some cash rich large growth stock companies, most companies use debt to raise funds and promote stock repurchases, And this method will be directly affected by the long-term high interest rate environment.
Perhaps because of this, the performance of the S&P 500 Buyback Index has lagged behind the overall performance of the S&P 500 Index by about 10 percentage points this year, recording its worst performance since 1998 (except during the 2020 pandemic). The repurchase index benchmark tracks the movements of stocks such as Marathon Petroleum Corp., Valero Energy Corp., CF Industries Holdings, and Akamai Technologies Inc.
In addition to high interest rates and unclear economic prospects, another reason for the significant withdrawal of repurchase scale this year is that the stock repurchase tax takes effect this year. Heavyweight stocks such as Apple, Alphabet, Meta Platforms, and Microsoft may be the first to be affected by this tax. These four companies are expected to implement stock repurchases of over $110 billion in the remaining period of this year.
Goldman Sachs strategist David Kostin said, "Repos are one of the most unstable uses of cash as companies adjust their repurchase activities based on their operating environment. Therefore, with almost zero profit growth this year, higher interest rate environments, and concerns from management about economic recession, the size of US stock repurchases for the entire year of 2023 is expected to decrease by 15% year-on-year." However, he also predicts that as the economic environment improves With the end of the Federal Reserve's interest rate hike cycle and corporate revenue growth, US stock repurchase spending may resume its upward trend next year, with a slight rebound of 4%. He also added that although corporate buybacks have slowed down, companies will still be the largest buyers of US stocks this year and next.
In Europe, the situation is exactly the opposite to that in the United States. Throughout history, European companies have preferred to repay investors through dividends. But Goldman Sachs strategist Guillaume Jaisson said that after the pandemic, stock repurchases have become increasingly popular in Europe. Stock repurchases have become the latest way for European companies to give back to investors because repurchases are more flexible than dividend payouts. However, Jason also pointed out that the latest repurchase boom in Europe is also facing threats from some financially tight governments, such as the Spanish and Italian governments that have announced plans to tax stock repurchases or impose temporary taxes on banks and other sectors that benefit from high interest rates.