Why the Wave of Stock Buybacks in 2018 May Be Even Better Than Expected

And Kearns thinks that investors should expect buybacks to continue based on historical metrics the last time there was a corporate tax holiday and added in the economic picture today. He said:

When we analyzed the last tax holiday in 2004, for example, S&P 500 buyback execution rose by 84 percent in 2004 and 58 percent in 2005. Companies are also operating in an improved business climate. The economy is strengthening, corporate earnings are expanding and businesses are generating more free cash flow. In addition, any company that isn’t actively allocating its cash effectively faces the wrath of disgruntled shareholders over capital management, and the potential unwanted attention of the activist community.

Canaccord Genuity also has pointed out how strong buybacks are likely going to come in above expectations. On February 20, asset class strategist Brian Reynolds said:

Buyback totals for the fourth quarter, which will be officially tabulated next month in the Fed’s Flow of Funds data and then by S&P, seem to be coming in much higher than our estimate of $109 billion. We have tabulated the share count data for the companies in the S&P 500 that have reported and multiplied that count by an average share price. Though there are still about 10% of firms whose share count data Bloomberg does not have yet, the results so far are prompting us to boost our fourth quarter estimate to $165 billion, which would exceed the $161 billion high for this cycle set in the first quarter of 2016 following the oil price panic.

This surge would explain much of the increase in stock prices in the fourth quarter. Normally, quarterly swings in buyback growth are not material, but this one appears to be so large that it is. If history is a guide, then the buyback acceleration also likely contributed to the stock price rise in January. The Wall Street buyback desks likely took their foot off the gas when the February stock pullback began but are likely picking up the pace now.

24/7 Wall St. has paid close attention to the raw number of stock buybacks that were noted in the wake of December’s tax reform passage and into the start of 2018. In fact, 13 recent dividend hikes and buybacks were simply too large to ignore. And even in December, 20 companies added in a whopping $100 billion in total buybacks.

Warren Buffett also has praised stock buybacks in the past. He has preferred to make acquisitions for Berkshire Hathaway Inc. (NYSE: BRK-A), but he also previously pointed out that buybacks increase the pool of earnings for shareholders on a per-share basis.

It’s easy to say that companies should not buy back stock at all-time highs. Yet, many of the companies that have been leading the stock market and the beloved Nasdaq ever higher pay no dividends or have no buyback plans. Companies like Alphabet, Facebook, Amazon, Netflix and even Buffett’s Berkshire Hathaway are effectively out of the stock buyback and dividend game. That’s more than 10% of the entire value of the S&P 500 that isn’t even participating in that game.