Buyback Mania

Is this a good time to be a buyer of U.S. stocks?  Corporate boards certainly think so.  According to Standard & Poor’s, U.S. companies are setting records for purchasing their own stock.  In 2018, the companies that make up the S&P 500 Index spent $806 billion on share buybacks, a 55 percent increase from 2017.  And it’s not just a few of the behemoths doing the buying.  Almost every S&P 500 constituent (444) repurchased shares in 2018.

The surge in buybacks is largely a result of the recent reduction of corporate income tax rates.  It follows that companies that pay less in taxes will have more discretionary cash on hand, a.k.a. free cash flow.  Management teams are tasked with deciding what to do with this free cash flow.  The main choices corporations have for deploying free cash flow include: expand operations, acquire other companies, pay down debt, increase dividends, and buy back stock.  Stock buybacks currently seem to be the preferred option.  And remember, the people making these decisions are the insiders who have the best information and greatest knowledge of their companies and industries.

The fact that so many corporate management teams are choosing to plow piles money back into their own company stock is a huge vote of confidence for the U.S. stock market as a whole.

1 April 2019                                                                                                                                                                                                     Group W Investment Management