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Stock Buybacks: DC’s New Bipartisan Pinata

Traders Magazine Online News, February 21, 2019

Nicolas Colas

Stock buybacks are good for corporate America, aren’t they? If so, aren’t they good for John Q Public and his 401K?

Not so fast. Nicolas Colas, co-founder of DataTrek explored the recent interest in corporate buybacks as they relate to politics and the recent rise of more progressive and social policies in a recent story. Here is the commentary as written by Colas:

“In a recent New York Times Op-Ed, US Senators Chuck Schumer and Bernie Sanders outlined a forthcoming bill to address the “crisis” in American public company stock buyback programs. It would require any company to pay employees $15/hour, provide 7 days/year of paid sick leave, and offer “decent pensions and more reliable health benefits”. Yes, pensions…

Lest you think that’s just one party’s view on buybacks, Senator Marco Rubio was out today with a series of Twitter messages with his own ideas about how to curtail public company stock buybacks. In his words: “Right now we don’t have a ‘free market’. We have tax code which engineers economy in favor of inflating prices of shares at the expense of future productivity & job creation”. His idea is to tax capital gains at the same rate as dividends. No word on whether this would be limited to just shares sold to a company or all cap gains…

We have 2 thoughts on this issue:

When the left and right agree on an issue, you have to believe some form of legislation will eventually pass. That’s especially true in the current political climate, when Democrats and Republicans do not seem to agree on anything.

Stock buybacks are deeply cyclical in nature, so the fact that their size has finally drawn DC’s attention is a worrying sign of a corporate profit top. Legislation on financial issues is almost always reactive, not proactive.

As far as what this means for investors, 3 additional points:

#1. Buybacks have exceeded dividends as the primary method of how large US public companies return cash to shareholders since Q1 2010. Data for the S&P 500 here:

For the 12 months ending September 2018 (latest data available), buybacks totaled $720.4 billion versus $445.9 billion for dividend payments. That 161% ratio is higher than any of the last 3 years (124% in 2017, 35% in 2016, 150% in 2015).

Over the same trailing 4 quarters ending September 2018, the companies of the S&P 500 paid out 56% of their operating income through stock buybacks. That is higher than 2017 (49%) and 2016 (58%) but lower than 2015 (65%).

Only during/right after the Great Financial Crisis do you find dividend payments exceeding buybacks. This happened from Q4 2008 to Q4 2009. By Q1 2010, buybacks ticked higher than dividends ($55.3 billion vs. $49.3 billion), and they haven’t looked back since.

#2. Stock buybacks have absorbed all the natural selling in US equities over the last several years.

The Investment Company Institute reports the following net redemptions from US equity mutual and exchange traded funds over the last 3 years: 2016: -$67.5 billion, 2017: -$50.2 billion, 2018: -$114.2 billion. Total: $231.9 billion.

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