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Friday, March 18, 2022
Stock buybacks attract a lot of unfavorable attention.
And so when headlines cross about record-high stock buybacks, outrage ensues.
I’m not going to argue for or against buybacks here. But if you’re looking to take a side, I offer some context so that your facts are straight.
First, the amount spent by S&P 500 companies to buy back stock did indeed hit a record in Q4 2021.
According to S&P Dow Jones Indices, these companies spent $270.1 billion buying back shares during the period. This is up from $234.6 billion in Q3 and $130.6 billion in Q4 2020.
For the full year, buybacks hit a record $881.7 billion in 2021, up from $519.8 billion in 2020 and $806.4 billion in 2018.
All that said, it’s not obvious that buybacks are distorting the stock market more so today than they might have historically. That’s because the value of the stock market has been climbing at a similar pace as buybacks.
S&P 500 buybacks as a percentage of the market value of the index’s company was 0.67% in Q4, barely above the long-term average of 0.64%.
While 0.67% is not nothing, it’s not particularly large either.
The relatively small scale of buybacks in the market is echoed by their relatively small impact on earnings per share.
JPMorgan Asset Management (JPMAM) decomposed S&P 500’s earnings per share (EPS) down to its growth drivers: revenue, profit margin, and change in share count.
If buybacks were having a material impact on earnings per share, then the impact of the change in share count would be significant.
However, JPMAM’s analysis found the change in share count actually had a modest net negative impact on EPS in 2021. From 2001 to 2020, on average the change in share count was responsible for just 0.3% of the 6.0% EPS growth during that period.
However, it’s possible that buyback activity may have a greater impact on EPS this year with stock prices having fallen significantly.
“Current indications are that companies have maintained their buybacks through the recent downturn, which means they'll be getting more shares for their expenditures and reducing share count even further, resulting in higher EPS,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said on Tuesday.
Analysts at Goldman Sachs expect buybacks to hit a record $1 trillion in 2022. Should stock prices remain depressed, these buybacks will likely account for a bigger share of market cap and EPS growth for the year.
By Sam Ro, the author of TKer.co. Follow him on Twitter at @SamRo.
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