Stock Buybacks Starting to Slow Down as Stock Market Keeps Rising

Investors love dividends and buybacks under corporate governance strategies for a return of capital. By the looks of it, corporate executives and board members must be getting gun-shy when it comes to stock buybacks now that stocks keep rallying. Maybe that is a good strategy now that the bull market is five and a half years old.

The long and short of the matter is that the amount of dollars being poured into stock buybacks is slowing down.

Standard & Poor’s has shown that members of the S&P 500 have slowed down the rate at which they are buying back stock. It turns out that share repurchases by these S&P 500 members fell by 1.6% from the second quarter of 2013 to $116.2 billion during the second quarter of 2014. Here is where the real drop off is though: buybacks sequentially were 27.1% lower from the $159.3 billion spent on stock buybacks during the first quarter of 2014.

One thing may be influencing the relative sequential drop, and that was that the first quarter’s large number of buybacks was the second largest on record. For the second quarter of 2014, companies reduced their overall spending on buybacks as the average daily stock price rose 3.6%.

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Buybacks still remain healthy in real dollar terms. For the 12 months ending June 2014, S&P 500 companies increased their buyback spending by 26.6% to $533.0 billion from the $420.9 billion posted during the same 12-month period in 2013. S&P said:

The twelve-month high mark was reached in fiscal year 2007, when companies spent $589.1 billion. The twelve-month recession low point was $137.6 billion, recorded in fiscal year 2009.

S&P’s Howard Silverblatt noted that buybacks are half of the stock supply story, with company stock issued for employee options, acquisitions and/or financing being the other half. Silverblatt said:

By reducing their share count, more companies are adding tailwinds to their EPS. During the second quarter, 23% of S&P 500 issues reduced their year-over-year share count enough to push up their earnings per share significantly versus just shy of 20% during Q1 and 12% during the second quarter of 2013. … If companies wish to continue the trend of decreasing share count (and therefore increasing EPS), they may need to spend more on buybacks. Third quarter prices are averaging +3.9% and the continuing bull market conditions are putting more options in the money. While share count reduction is a management tool for EPS growth, most companies have shown a tendency to protect their EPS from dilution by at least covering their employee issuance.

Other buyback trend data were as follows:

  • S&P Dow Jones Indices’ data show that more companies continued to reduce their share count, with 295 doing so in Q2, up from 290 in Q1 2014 and 223 in Q2 2013.
  • Significant changes continued to strongly favor reductions, as 126 issues reduced their share count by at least 1%, up from last quarter’s 123 issues and 90 issues for Q2 2013.
  • Share reduction change impacts of at least 4% (Q2 2014 over Q2 2013), which can be seen in EPS comparisons, were 116 in Q2 2014, up from the prior quarter’s 99, and Q2 2013’s 62.
  • Over the year ended June 2014, buyback and dividend expenditures combined reached a new record high of $865.9 billion, with buybacks representing 61.6% of the total.

A table below shows the sector-by-sector review of which sectors were doing what in the realm of buybacks.

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