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Big US companies will spend half as much buying back their own stock this year compared with 2019, Goldman Sachs analysts predict, weakening a vital prop for the market as companies shore up their balance sheets.

Share repurchases for companies in the benchmark S&P 500 index will hit $371bn by the end of the year, 50 per cent lower than the $730bn spent last year, according to Goldman estimates circulated to clients on Friday and released on Monday.

David Kostin, the investment bank’s chief US equity strategist, said 51 companies had suspended their share repurchases since the beginning of March — equivalent to 27 per cent of aggregate buybacks last year.

“A spate of recent suspensions, escalating employee lay-offs and increasing political and social pressure will curtail buyback spending, which remains historically elevated following the passage of corporate tax reform,” Mr Kostin wrote in a research note.

This reduced demand “from the principal buyer of shares during the past decade”, he added, would lead to wider trading ranges, less support for the market during sell-offs and slower growth in earnings per share.

Column chart of Share repurchases for S&P 500 companies including 2020 estimate ($bn)* showing US share buybacks to crater in 2020

A drop in spending on buybacks will add further pressure on a market grappling with the fallout of coronavirus on the global economy.

Share buybacks have boomed since the financial crisis and reached a record $806bn in 2018, the first year of the corporate tax cuts ushered in by US president Donald Trump, helping to boost the stock market to record highs. Apple, the biggest spender in recent years, typically buys more than $10bn of its shares every quarter. 

The repurchases have attracted the attention of politicians. Mr Trump expressed dismay that companies had used the tax cut to buy back stock. Joe Biden, the frontrunner for the Democratic nomination in this year’s presidential elections, last month called on US chief executives to “publicly commit now to not buying back their company’s stock” for a year. Bernie Sanders, his opponent, wrote an opinion article last year calling for curbs on buybacks.

The US government’s $2tn spending package to mitigate the economic damage of the pandemic bans companies that take a loan under the package from paying a dividend or conducting share buybacks for 12 months until after the debt is repaid. Aircraft maker Boeing and airline Delta are among big companies to have announced halts to their share repurchases and dividends.

Line chart of Quarterly share repurchase ($bn) showing Big US banks are among the largest buyback spenders

A group of eight big US banks has also paused share buybacks. This group includes four of the biggest spenders on share buybacks in the S&P 500 — Bank of America, JPMorgan, Citi and Wells Fargo. Despite agreeing to cut buybacks, US banks have argued they wish to continue paying out dividends, which they perceive as a marker of financial stability.

Goldman analysts forecast that dividends for companies in the S&P 500 will fall 25 per cent this year. Investors in the futures market are betting that dividends for companies in the benchmark will remain below 2019 levels for the next nine years.

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