(Bloomberg) – The recent increase in interest rates may be causing nervousness among some investors, but it is unlikely to prevent a shopping spree among the biggest whales in the stock market: the corporations themselves.
American companies’ stacks of cash and an optimistic profit outlook are raising expectations that more executives will follow in Warren Buffett’s footsteps and unleash a wave of stock buybacks, adding a layer of stock market support after the buybacks have plummeted. last year. At the very least, purchases could help offset an increase in the stock offering this year by a parade of special takeover companies going public and a record number of secondary offers.
“When you see cash flow accelerate, you see buybacks right away,” said Gina Martin Adams, chief share strategist at Bloomberg Intelligence. “There is a huge amount of money standing outside, with nowhere to go.”
The S&P 500 companies entered this quarter with more than $ 2.2 trillion in cash and Wall Street is projecting a 24% profit growth in 2021, according to data compiled by Bloomberg.
Repurchases between companies in the benchmark index have already shown signs of recovery. Repurchases rose to $ 120 billion in the last three months of 2020, an increase of 28% over the previous quarter, according to data compiled by Bloomberg. For the first time since the Covid-19 crisis, more than half of the index bought back shares. Still, repurchase activity remains well below the pre-pandemic levels of $ 197.7 billion recorded in the first three months of 2020.
If repurchases return to average levels in the five years prior to 2020, repurchases will expand by almost 50% in 2021, according to Adams. In a survey conducted by RBC Capital in mid-March, about 60% of analysts said that repurchases are a priority for management teams looking to deploy money. Only dividends received a higher score of 76%, said the head of the bank’s stock strategy in the United States, Lori Calvasina, in a note to customers.
“US stocks will be strong in 2021, supported by a rebound in repurchases, solid dividends, a rebound in margins and strong fundamental economic support,” she wrote, while noting that expensive valuations are likely to limit earnings.
Muted Effect
Not everyone is optimistic about the buyback effect. Although repurchase activity is expected to increase this year, it is unlikely to reach the levels seen before the pandemic thanks to high price / earnings multiples and declining investor enthusiasm for repurchases, according to the stock strategist at Bank of America Corp . The increase in corporate purchases will also be silenced by a boom in companies that raise money from the sale of shares, Hall said in an interview.
The bank’s corporate clients repurchased $ 3.7 billion in shares last week, the second highest total on record, Hall and his colleague Savita Subramanian wrote in a research note. The purchase has been led by technology companies, but sectors such as health, discretionary and financial consumer goods have accelerated purchases.
Technology companies, many of which have had a business boom in the past year, have remained steadfast in their purchases in relation to other sectors. The technology was responsible for 44% of the total repurchases in the S&P 500 in the fourth quarter, compared to 27% in the same period of the previous year. Sectors that have drastically reduced buyback activity, such as discretionary and industrial consumer goods, are ready to grab more shares as profits rise, said Adams of Bloomberg Intelligence.
Primary Buyer
The biggest buyer by far was Apple Inc. The tech giant bought back $ 24.8 billion in shares in the last quarter, more than the next four largest buyers together, according to data from Bloomberg. The iPhone maker may set the tone next month, when it usually updates investors about its capital return plans in conjunction with second-quarter tax profits.
Of course, some investors disapprove of companies that put money to work by buying their own shares, rather than investing in things like acquisitions or research and development. However, even Buffett is a fan these days. The head of Berkshire Hathaway Inc., who in the past criticized repurchases, spent more than $ 24.7 billion of his company’s cash on repurchases in 2020 and praised the purchase of Apple for increasing Berkshire’s stake in the company.
Berkshire Hathaway continued to snap up its own shares in 2021 and is expected to buy more, the billionaire investor wrote in his annual letter to shareholders last month.
“The process offers a simple way for investors to have an increasing share of exceptional deals,” said Buffett before quoting Mae West: “Too much of a good thing can be … wonderful.”
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