One of the defining features of the US stock market is its penchant for big share buybacks.
Corporate America bought $736bn of its own stock last year, according to preliminary figures from S&P Dow Jones Indices. That is 15 per cent less than in 2018, when buyback mania reached a peak of $866bn. But factor in the record-shattering $485.5bn in dividend payments and 2019 is the second year in a row that companies returned more than $1tn to their shareholders.
At first glance, this might be cause for celebration. But buybacks only return money to investors indirectly, by boosting stock prices. Gains can be fleeting and often have a air of desperation. Look at Boeing. The crisis-hit stock is down nearly a quarter from its March 2019 peak. This despite the aerospace giant dishing out nearly $8bn in dividend and share buybacks over the first nine months of the year.
Share buybacks have played a role in bolstering the stock market to record highs by reducing the share count and boosting company earnings per share. The S&P 500 ended last year up nearly 30 per cent, even as underlying profits growth stagnated.
Yet despite the rise in buybacks, the average S&P 500 stock is expected to offer a dividend yield of just 1.8 per cent during the fourth quarter. That compares with 2.17 per cent in the prior year, and would be the lowest level for that quarter since 2010, according to S&P data. In other words, investors are paying expanded multiples for poorer quality earnings.
US companies will begin to report fourth quarter earnings next week, issuing guidance for 2020 as they tick off the last full year. Investors should look at exactly how much rising EPS derives from lower share counts, and how much from profits growth. Rampant buybacks have been suggested as an early sign of an unhealthy economy. They are certainly a signal that some companies are running out of ideas.
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