The world’s 1,200 largest corporations bought a record $1.3 trillion worth of their own stock in 2022, three times the dollar value of the same purchases made ten years earlier, the Financial Times reported.
The amount spent to buy their own shares nearly equaled the amount in dividends paid to shareholders, the FT noted.
Dividends have grown by 54 percent over the past decade.
The pace of buybacks has not slowed this year; Airbnb, Apple, catering company Compass, and HSBC Bank all have announced new rounds of purchases.
In 2022, oil companies were the most enthusiastic buyers, paying $135 billion to reduce the number of shares available to the public.
Buybacks are a way to distribute more dividends to shareholders. However, buybacks also inflate share prices, a key metric used to calculate executive bonuses.
The stunning volume of buybacks has begun to attract the attention of regulators and politicians.
The U.S. Congress imposed a 1-percent tax on buybacks in January and President Joe Biden recently called for it to be raised to 4 percent. The Securities and Exchange Commission (SEC) now requires corporations to disclose basic details about their buybacks.
“Used badly, [buybacks] can be used to manipulate [earnings per share] upward to meet medium-term management incentive targets at the expense of investments that might be important to a company’s long-term health,” CEO Euan Munro at Newton Investment Management told the FT.
“We would prefer buybacks to be less prevalent,” he added.
Buybacks are an “environmental hazard” that “benefit traders, hedge funds, senior executives, and near-term stock prices,” Daniel Peris, a fund manager at Federated Hermes, said to the FT.
Manager Abrie Pretorius at Ninety One was even more blunt. “Most buybacks help [corporate optics] but destroy value,” he told the FT.
The share price of companies that have made large buybacks in the past decade has underperformed the overall market, according to Invesco.
Most common in the U.S., buybacks are becoming a tool of choice elsewhere.
Japan’s corporations are on a record buyback spree, as we detail in “Japan’s Stock Market Climbs to 33-Year High” in this issue.
For the decade beginning with 2012, U.K. companies doubled their investment in stock repurchases to the equivalent of $148 billion.
That could be “problematic if it takes root in the U.K.,” Michael Stiasny, who oversees British equity markets for M&G, said in an FT interview. “The likely outcome would be that the market winds up yielding permanently less than it could.”
Not all agree.
“The idea that buybacks are a bad thing, or simply a way to manipulate your stock, couldn’t be further from the truth,” portfolio manager James Tierney at AllianceBernstein [sic -no space] said to the FT.
Tierney specializes in growth stocks, which are expected to rise in price through the medium to long term and would benefit from buybacks.
“Buybacks play an important role in the functioning of healthy and efficient capital markets,” Neil Bradley, chief policy officer of the U.S. Chamber of Commerce said in a public statement last week.
The chamber is suing the SEC to block it from forcing corporations to disclose even more details about their buybacks.
Now, however, the tide of buybacks may be receding, some analysts have said.
Goldman Sachs expects their volume to drop to $808 billion this year, down about 15 percent from 2022.
“The slowdown in U.S. earnings growth, the increase in policy uncertainty following the recent banking stress, and high starting valuations at which to repurchase stock all pose headwinds to buybacks,” David Kostin, chief equity strategist at Goldman, said in a note.
TREND FORECAST: For some senior executives, buybacks have been the easy way to boost share prices and, with them, their annual bonuses. Rather than innovate or do the work of managing deftly, they use cash to play the market instead of investing in their companies’ futures.
Regulators’ scrutiny will curb some of the excess. However, reining back the practice back to reasonable instances will depend on shareholders’ anger at executives who short-change a business’s future for their own short-term profit… which will not happen.
Need more proof? Read our past articles:
● “CORPORATE STOCK BUYBACKS SET RECORD” (21 Dec 2021)
● “U.S. CHEAP MONEY PUMP, PUMPING” (3 Dec 2019)
● “FALSE PROFITS AND MONEY JUNKIES” (5 Nov 2019)
● “EQUITIES AND THE ECONOMY” (19 Sept 2018)
● “GLOBALNOMIC 2017 REPORT” (29 Nov 2017)