US Corporations Are Still Lining Up to Buy Back Their Own Shares
■ Market’s biggest buyer spent an
estimated $1 trillion in 2022
■ Business confidence holds up even as investor
January 9, 2023 at 12:23 PM EDT
The rising threat of an economic recession has
done nothing to dissuade Corporate America from spending big on its own shares.
American firms announced a record $1.26 trillion
of share buybacks in 2022, up 3% from a year ago, according to data compiled by
Birinyi Associates. By the firm’s estimate, companies executed on 82% of that
total, spending $1.03 trillion. And the outlays aren’t just to offset employee
stock grants that would otherwise dilute ownership, Birinyi found. The number of
shares outstanding has shrunk for the top buyers in recent years, a sign that
those repurchases have bolstered equity prices, or in the case of 2022’s bear
market prevented losses from snowballing.
As companies retrench for an economic slowdown,
cutting costs on everything from advertising to travel and hiring, the continued
commitment to share buybacks serves as a counter to the doom and gloom on Wall
“Despite 98% or whatever survey you want to use of
CEOs saying they are worried about a recession, they are still comfortable
enough to spend money on stock buybacks, so are they really that worried?” said
Jeff Rubin, director of research at Birinyi Associates. Barring a severe
recession, another year of $1 trillion or more of buybacks wouldn’t be
surprising, he said.
Source: Birinyi Associates
The steady demand from repurchases continues to be
one the few upward forces left in the market at a time when investors of all
stripes have been pulling back from stocks. About one week into 2023, an index
tracking companies with the highest buybacks has beaten the S&P 500 by 1.9
percentage points — the second-best start to a year since 2009. During the past
decade, the basket outperformed by 45 percentage points.
Spending money on stock has repeatedly drawn
criticism from politicians and academics who say the cash would be better used
to help boost long-term growth, such as employee benefits and equipment
upgrades. A law imposing a 1% tax on buybacks goes in effect this year.
Money managers who worry that the Federal
Reserve’s aggressive rate hikes threaten to thrust the economy into a recession
and hurt corporate earnings are urging business leaders to rein in the
expenditure. In the latest Bank of America Corp. survey, 56% of pros preferred
chief executives to focus on strengthening their balance sheets, compared with
16% who favored buybacks.
Of course, it’s far from certain that corporate
America’s buying spree will continue. In a November note by Goldman Sachs,
strategists led by David Kostin forecast buybacks to fall 10% in 2023. In the
event when the economy falls into a recession, the team predicted, buybacks
would drop 40%.
There is also doubt whether companies are carrying
out repurchases to counter the dilution effect when stock grants to employees
are exercised. In the view of Birinyi’s Rubin, that concern is misplaced. While
the practice exists for some firms, the majority of buybacks have worked to
reduce the pool of shares.
Take the top 20 corporate buyers, which account
for almost half of total repurchases. Since the end of 2019, all but five of
them have seen their shares shrink. In the third quarter alone, the latest
period when the data on actual buybacks are available, about one-fifth of
members in the S&P 500 reduced their share count by at least 4%, data compiled
Still, skepticism persist over the lasting power
of corporate buyers. With banks kicking off earnings season this week, more
companies enter what is generally assumed to be a blackout period for buybacks.
Fourth-quarter profits are expected to fall 3% from a year ago, according to
analyst estimates compiled by Bloomberg Intelligence.
“The buying coming from buybacks is unlikely to
come back in the very short term. We are in a blackout right now,” said
Christophe Barraud, chief economist and strategist at Market Securities LLP. “In
addition, I don’t think that buybacks will go up compared to last year.”
— With assistance by Isabelle Lee
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