The pullback of corporate share purchases has not stopped the stock market rallying back to a record high © AP

Stock buybacks by US companies nearly halved in the second quarter to the lowest level in eight years as businesses grappled with a sharp rise in uncertainty and a swift decline in profits.

Provisional figures show the total spent on buybacks by companies in the S&P 500 was about $89.7bn, according to S&P Dow Jones Indices, down 46 per cent from the same quarter last year.

The data is based on results from 95 per cent of the companies in the index. If the estimate holds true, it would mark the lowest quarterly total for buybacks since the first quarter of 2012.

The decline was steeper than the fall in corporate profits, which contracted by a third in the quarter among companies in the S&P 500 due to the coronavirus pandemic. The drop in buybacks would have been steeper still without a big one-off share repurchase by T-Mobile US, the telecoms company.

Share repurchases have drawn criticism over the past decade for juicing earnings per share growth at the expense of making investments in the underlying business, and for potentially inflating stock market valuations.

The pullback in purchases did not stop the S&P 500 rallying hard in the second quarter, however, and the US benchmark this week closed at a record high.

Line chart of $bn* showing US share buybacks plummet in second quarter

“The market is up without share buybacks because we see the light at the end of the tunnel and can see where economic growth is going,” said Diane Jaffee, a senior portfolio manager at asset manager TCW. Buybacks were “really only the propellant when there was not a lot of earnings or potential economic growth and that was the only game in town”, she added.

The S&P data showed that an absence of share buybacks by the big banks contributed to the sharpness of the drop in the second quarter. Morgan Stanley, Goldman Sachs, JPMorgan Chase and Bank of America were among those to announce they were stopping repurchases in March, when market confidence appeared fragile and banks were beginning to contemplate large provisions for future loan losses.

Apple held its crown as the biggest spender on its own stock in the second quarter, buying $17.6bn of its shares, either directly in the market or via settlement of share options, according to S&P. The iPhone maker notched a revenue record for the June quarter and on Wednesday its market value rose above $2tn for the first time.

T-Mobile US was the second-largest purchaser of its own stock, at $17.1bn, in a transaction related to SoftBank’s sale of its stake in the company. Without that sum, S&P’s buyback forecast for the second quarter would be $72.6bn across the S&P 500, 56 per cent lower than last year.

Alphabet and Microsoft were among a handful of large companies to increase buybacks in the period, as was Berkshire Hathaway. Warren Buffett’s company, which ended June with a record cash pile of $146.6bn, bought $5bn of its stock over the three-month period compared with less than $550m last year, according to S&P data.

One result of the overall drop in buybacks: S&P 500 companies spent more on dividends than on share repurchases for the first time since 2009. Companies returned $119bn of their profits in the form of dividends in the quarter, up slightly from a year ago despite the coronavirus crisis.

Howard Silverblatt, senior analyst with S&P Dow Jones Indices, said he expected buybacks to remain muted in the third quarter but said there might be an uptick in the fourth if it appears Joe Biden is likely to win the US presidential election in November.

Mr Biden has criticised share repurchases in the past and Democratic senators Chuck Schumer and Bernie Sanders have previously called for limits on buybacks.

Companies might bring forward buybacks if they fear Mr Biden would look to introduce curbs on the purchases, Mr Silverblatt said. “We have been hearing from companies that they might bulk up on their own stock in anticipation.”

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