On May 10th, U.S. companies have been outperforming expectations during the recent earnings season, surprising many Wall Street analysts. Simultaneously, these companies have been ramping up their stock buyback programs, providing an additional boost to the recovering stock market.
According to data compiled by research firm Birinyi Associates, as of Monday, S&P 500 index component companies that have reported first-quarter earnings bought back stocks worth $181.2 billion in that quarter, a 16% increase from the same period last year. A research report released by Bank of America Securities on Wednesday indicated that the pace of stock buybacks has exceeded the same period last year for nine consecutive weeks.
Leading the wave of stock buybacks are large tech companies. Meta, the parent company of Facebook, repurchased $14.5 billion worth of stocks in the first quarter, an increase of about $5 billion from the same period last year. Tech giants like Apple, Netflix, Nvidia, as well as financial institutions like Wells Fargo, Caterpillar, and Oshkosh Corporation, have also intensified their stock buyback efforts.
Analysts anticipate this spending trend to continue. Last Friday, Apple's stock price saw its best single-day performance since 2022 after the company announced plans to repurchase $110 billion of its own shares. Birinyi Associates' data also reveals that 443 companies have announced stock buyback plans this year, surpassing the 378 companies during the same period last year.
Despite lingering concerns in the market about a potential economic slowdown or persistently high interest rates, investors view the increase in stock buybacks as a sign of strengthened confidence among corporate executives.
Jeffrey Yale Rubin, President of Birinyi Associates, stated, "U.S. companies believe in their fundamentals, they are not worried about interest rate fluctuations or balance sheet conditions. If the people who know these companies best are buying back their own stocks, why shouldn't I follow suit?"
The S&P 500 index has already risen by 9.3% year-to-date, including a 3.5% increase since May, marking the best monthly start since 2009.
The surge in stock buybacks this year follows a significant decline in the stock market last year. During that time, buybacks of S&P 500 index components plummeted by 14%, marking the second-largest annual decline since the global financial crisis of 2008, amidst market concerns about high interest rates potentially leading to an economic downturn. Some companies rushed to repurchase stocks in 2022 before the new buyback tax of 1% took effect.
While interest rates remain at multi-decade highs, the extra yield required by investors to lend to large corporations over government bonds has dropped to multi-decade lows.
Goldman Sachs analysts predict that total stock buybacks by S&P 500 index component companies will reach $925 billion this year, increasing to $1.075 trillion by 2025, with annual growth rates of 13% and 16%, respectively.
Stock buybacks, which reduce the number of outstanding shares and boost earnings per share, are popular among investors. For instance, Meta's stock price surged by 23% after announcing a buyback plan of up to $50 billion in February, marking its largest single-day gain in nearly a decade.
Stock buybacks offer a relatively flexible way to utilize cash, typically at the discretion of the company and without a fixed deadline. In contrast, other cash uses such as investing in new factories or paying regular dividends are harder to halt during economic downturns. Additionally, investors often have to pay taxes on dividends received.
While large-scale buybacks can enhance stock attractiveness, some investors caution that this should not be the sole reason for buying stocks. Buybacks may sometimes signal a slowdown in business, as rapidly growing companies usually reinvest cash into business expansion.
Tim Thomas, Director of Research and Wealth Management at Badgley Phelps, stated that buybacks "should be part of an overall strategy to enhance shareholder returns." He emphasized that massive buybacks alone may not boost stock prices if companies fail to increase revenue or find other effective investment avenues.
Although large tech companies are among the primary buyers of their own stocks, they are also making significant investments in other areas. For example, Meta and Google's parent company Alphabet have started issuing dividends for the first time this year, with five out of the so-called "Big Seven" now paying dividends. Moreover, many large tech companies are planning to invest billions of dollars quarterly in developing artificial intelligence capabilities.
Sarah Kanwal, Director of Equity Management at Crestwood Advisors, expressed confidence in these spending decisions, noting that they have not reduced investments in innovation and research and development.
