The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds – it’s companies buying their own stock, by a 6-1 ratio.
CEOs, who just announced the biggest round of monthly repurchases ever, executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012, data compiled by Bloomberg and Investment Company Institute show.
If you sell a share of stock in the U.S. market, there’s a fair chance the buyer is the company that issued it – and it’s buyers who have been on the right side of the trade since 2009. Buybacks are helping to prop up a bull market that is entering its seventh year just as investors bail out and head back to bonds.
“Buybacks have come up in every meeting with clients and always have, because of the observation that the largest buyers of stocks have been companies themselves,” Dan Greenhaus, chief strategist at BTIG LLC in New York, said by phone. “For the last few years, that’s been the right call.”
Repurchases by U.S. companies averaged $46.1 billion a month in 2014, compared with $7.1 billion in ETF and fund inflows. Investors have pulled more than $10 billion out of equity funds in January and February and sent $38 billion to bonds – even as companies announced $132.7 billion more in buybacks. February’s total of $104.3 billion was the highest on record, according to TrimTabs Investment Research.
Companies with the most buybacks are beating the market. The S&P 500 is up by 1.6 percent for the year, after falling from a record Monday, and closed at 2,098.53 on Wednesday, down by 9.25, or 0.44 percent. The S&P 500 Buyback Index, which contains the 100 companies with the highest repurchase ratio, has climbed by 4 percent this year.
“It’s amazing that people are still sitting on the sideline getting zero-something percent returns,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in a phone interview. “Usually when you get where everyone says we’re in a bull market, you see big money coming out of lifeboats and chasing yield, yet we haven’t seen the mass money come in.”
The reluctance of investors to pile into equities has left corporate America the larger source of cash throughout the bull market. Buybacks exceeded inflows by $468 billion last year when the S&P 500 climbed by 11 percent and $318 billion more in 2013, when the gauge had its biggest advance since 1997.
Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. They were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled in October showed.
Not everyone is convinced that buybacks are good. They’re used to boost per-share earnings in a way that enhances the pay of chief executives, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell. “Companies use a phony ideology saying if you maximize your shareholder value you somehow increase the efficiency of the economy,” Lazonick said in a phone interview. “But the only justification for doing it that holds water is that executives get a lot of their income from buybacks.”
Home Depot, Comcast and TJX were among 123 companies that disclosed repurchases in February. The increased buybacks came as plunging oil and a strengthening dollar threaten to stall five years of earnings expansions.
Profits from S&P 500 members will decline at least 3.2 percent this quarter and next, according to analysts’ estimates compiled by Bloomberg. For the full year, growth will be 2.3 percent, down from 5 percent in 2014.
Buybacks will boost per-share earnings, with the potential of helping avoid the first back-to-back profit contractions since 2009, according to Yardeni Research.
“In the last earnings season, the strength of the dollar clearly had a negative impact on earnings guidance by a lot of companies,” Dan Miller, who helps oversee $23 billion as director of equities at GW&K Investment Management, said by phone. “In some cases, the announcement of buybacks was perhaps meant to soften the blow a little bit. It shows the management is committed to their own stock.”
Corporations and investors have switched positions as the bigger buyer of stocks. Inflows from equity funds exceeded corporate buybacks every year in the late 1990s, contributing a total of $640 billion over the three years through 2000. That compared with $418 billion from share repurchases.
Companies have since taken the lead, with buybacks setting a record $589 billion in 2007. Last year, corporations beat all other groups as the biggest source of fresh cash to the stock market, according to a January report by Goldman Sachs Group, which tracks money flows from pension funds, foreign investors and ETFs.
The S&P 500 will increase about 7 percent to 2,238 by the end of 2015, according to the average of 21 equity strategists surveyed by Bloomberg. The Nasdaq Composite Index closed above 5,000 for the first time in 15 years on Monday and is within 2 percent of a record.
S&P 500 companies hold $1.75 trillion in cash and marketable securities, data compiled by Bloomberg show.
“These companies do this because they can,” Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion, said in a phone interview. “So many have tremendous amounts of cash historically, and the investment rates on short-term cash are not too attractive. It’s good for the company and good for stockholders.”