US companies’ share buyback plans smash record

Tax cut windfall pushed new authorisations to $437bn in the second quarter.

  • By Andrew Edgecliffe-Johnson,
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Stock buyback announcements by US companies smashed records in the second quarter, feeding the debate over how boardrooms are spending their windfall from the Republican tax cuts President Donald Trump signed into law in December.

The almost $437bn in buyback plans announced in the three months to June 30 eclipsed the previous quarterly record of $242bn, which was set just three months earlier, according to TrimTabs, an investment research company.

Repatriation is good for investors

Companies brought back billions to the U.S and it may go to shareholders.

“Corporate America’s actions suggest that most of the benefits of the corporate tax cut will flow to investors in general and top corporate executives in particular,” TrimTabs said. The research company noted that most senior executives have large stock-based compensation packages, which will benefit from using shareholders’ money to reduce the number of shares the company has in issue, boosting the price per share.

TrimTabs drew a contrast to the relatively small distributions of tax benefits to employees, estimating that the sum committed to buybacks last quarter “could fund 6.8m $1,000 bonus cheques to workers every single trading day”.

Investors are more focused on the balance between buybacks and capital expenditures, as they study the second-quarter US earnings season that began in earnest this week. Corporate earnings statements will reveal how large a proportion of the share buybacks authorised in the quarter were actually carried out.

Capex spending started the year strong, rising 24 per cent to $166bn in the first quarter, according to Credit Suisse. Analysts were surprised to see the pace of growth in capital spending among S&P 500 companies outstrip the increases in buybacks and dividends, but the total spent was still below the spending on buybacks in the same period.

“Capex growth is improving for the first time in six years, and it is playing a key role in the recovery. This development is giving us some cause for optimism on the longevity of the business cycle,” Morgan Stanley chief economist Chetan Ahya wrote last month.

Trade war fears have started to sour expectations for the capex boom continuing at the same pace, however, with the Business Roundtable reporting in June that its index of members’ plans for capital investment fell 7.8 points in the second quarter, to 107.6 points.

Consensus estimates for second-quarter US earnings have been rising ahead of the reporting season, but analysts are looking to earnings announcements to provide more guidance on companies’ spending plans. Investors are also watching whether the recent rise in wage growth to post-crisis highs has started to affect profit margins.

TrimTabs said 63 companies announced buybacks of at least $1bn in the second quarter. Apple led the list with its record $100bn buyback announcement in May, and 19 financial services companies contributed a combined $112bn to the total, with Wells Fargo, JPMorgan Chase and Bank of America each announcing plans to buy in more than $20bn of their own shares over the coming months.

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