Amid the market volatility, corporations have been ramping up their stock buyback programs, providing a backstop of support — and a measure of relief — for investors. Neil Kearns, head of the Securities Division’s Corporate Trading desk at Goldman Sachs, explains why 2018 is poised to set new corporate buyback records.
From your vantage point in helping companies authorize and execute share buyback programs, what type of activity are you seeing on the desk?
Neil Kearns: The first two weeks of February witnessed the most active period in our desk’s history, with executions (notional dollars spent) increasing by 4.5x our 2017 average. Buyback authorizations — when companies announce their intentions to repurchase their stock — have surged by 100 percent over the same period. To put that in perspective, it’s the fastest-ever start to the year in terms of repurchase authorizations. In fact, we’re likely to see the highest-ever level of share repurchase activity in 2018.
What are some of the factors driving the activity?
NK: Certainly, U.S. tax reform and corporate repatriation of offshore cash are meaningful catalysts. When we analyzed the last tax holiday in 2004, for example, S&P 500 buyback execution rose by 84 percent in 2004 and 58 percent in 2005. Companies are also operating in an improved business climate. The economy is strengthening, corporate earnings are expanding and businesses are generating more free cash flow. In addition, any company that isn’t actively allocating its cash effectively faces the wrath of disgruntled shareholders over capital management, and the potential unwanted attention of the activist community. Stock buyback activity is also highly correlated to the broader market volatility, so many companies used last month’s market correction as an opportunity to get a head start on their buyback program objectives for the year. In fact, our colleagues in Goldman Sachs Research recently raised their estimates for 2018 S&P 500 total cash spending by 15% to $2.5 trillion, with a 23% jump in share buybacks to $650 billion, due to tax reform and the recent market correction. Companies have typically taken advantage of short-term market dislocations by increasing their pace of activity at lower price levels, recognizing that for quite a number of years now, these pullbacks have been limited in occurrence and duration, as equities have continued to march higher.
What are the broader implications for investors and the market?
NK: The buy-side community is highly focused on what companies are doing in the market, particularly in response to equity volatility. Since corporations have been the largest net buyers of U.S. equities since 2010, there’s obviously a keen interest in understanding their general sentiment in light of market swings, and ongoing commitment to their repurchase plans. For example, since the financial crisis in 2008, companies in the S&P 500 have bought back about $4.25 trillion of their own stock, which represents about 17 percent of the current market cap of approximately $24.5 trillion. We undoubtedly see more interest in corporate behavior with respect to their buyback programs when markets exhibit high volatility. Based on both the pace of repurchase announcements and actual buyback activity, investors can take comfort in the fact that the share repurchase bid is very much alive.
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