The year has just begun, and US companies are planning a $155 billion share buyback. In total, forecasts for 2024 put this figure at $885 billion, 10% more than in 2023 but still 4% below the 2022 record.
For investors, this intel should be a big deal. Since 2011, share buybacks have been a major factor, accounting for 40% of total US stock market returns, especially in the S&P 500 index.
Indeed, other factors such as dividend growth, EPS, and P/E multiples also matter, but Pavilion Global Markets' data suggests they carry less weight.
In theory, buybacks make sense when companies have more liquidity than they pay out in dividends or have profitable investments on the horizon and their shares are undervalued.
At the moment, large companies tend to focus more on returning capital than growing it.
Take big oil as an example.
Despite earning a whopping $357 billion in the seven years following the Paris Agreement, they chose to invest billions in share buybacks and dividends instead of fully engaging in the transition to renewables.
Specifically, the five major oil giants spent more than their profits on shareholders: $428 billion in 2016-2022, of which $316.7 billion went on dividends and the rest on share buybacks.
The jury is still out on whether this move makes sense for the greater good.
Big Tech isn't exactly in a better spot. The combined cash stash of companies like Apple, Microsoft, Alphabet, Alibaba, Amazon, and Meta tops $500 billion. The burning question: where's all that moolah headed?
If it goes into share buybacks, it's a win for shareholders, but only in the short run. Investing in promising projects or breaking into new business frontiers would better serve long-term gains.
The fact that companies are cutting back on investment raises alarm bells about their future growth potential, including expansion and competitiveness. It is, therefore, essential to be cautious about these stocks.
And let's not forget that while buybacks can increase EPS by reducing the number of shares, this does not necessarily mean that the company's fundamentals are improving.
Relying too much on buybacks can look like a financial maneuver rather than actual value creation.
The sweet spot? A balanced approach where a company distributes its free cash flow not only in buybacks but also in growth investments, cutting debt, paying dividends and maintaining a healthy cash cushion.
As for how to detect a possible change in market sentiment towards a specific stock or the index itself, it is crucial to follow the support and resistance indicators.
