For the first time in a decade, American corporations are channeling more funds into stock buybacks than into future investments.
According to a Goldman Sachs report released Friday, S&P 500 companies dispensed $384 billion in buybacks in the first half of 2018. This substantial payout to shareholders marks a 48% increase from the previous year, fueled by soaring profits linked to corporate tax reductions and a robust US economy.
However, this does not imply that companies are neglecting investments that create jobs, such as new machinery, research, and factories. Overall business investment has risen by 19% — yet buybacks are outpacing this growth.
Goldman Sachs noted that buybacks are now capturing the largest portion of cash expenditures by S&P 500 firms, marking a significant shift as capital investments had been the predominant use of corporate cash for 19 of the last 20 years.
Furthermore, this trend shows no signs of stopping. The firm forecasts that total share buyback authorizations for all US companies will exceed $1 trillion for the first time in 2018.
Apple (AAPL) alone allocated an impressive $45 billion to buybacks in the first half of 2018, tripling its expenditure from the same period last year. This included a record-breaking amount in the first quarter.
Other notable companies, including Amgen (AMGN), Cisco (CSCO), AbbVie (ABBV), and Oracle (ORCL), have also significantly increased their buyback initiatives.
‘Blackout’ could lead to risks
While shareholders often welcome buybacks in the short run, one reason for this approval is that buybacks tend to artificially enhance earnings per share by decreasing the number of shares available.
Additionally, when companies enter the market with large purchase orders, they provide consistent demand, which boosts share prices.
However, the influence of buybacks is so significant that some analysts express concern about stock performance in their absence. Firms are typically restricted from repurchasing stock during “blackout” periods that commence one month before earnings reports are due.
David Kostin, chief U.S. equity strategist at Goldman Sachs, cautioned that the impending blackout period presents a “near-term risk” for the market, noting that volatility tends to rise during these periods.
Increased business expenditure
On a positive note, large corporations are investing a considerable portion of their profits resulting from the corporate tax reform. The Republican tax legislation, enacted in late 2017, decreased the corporate tax rate from 35% to 21% and offered tax incentives for repatriating foreign profits.
Goldman Sachs projects that capital expenditures are on track for the fastest growth in 25 years at least.
“Claims that capital expenditure’s decline is imminent are misinformed,” Kostin stated.
The surge in business expenditures, similar to buybacks, has been driven predominantly by some of the largest firms in the United States, with Goldman Sachs estimating that 79% of S&P 500 capital expenditure growth comes from just ten companies.
For instance, Alphabet, the parent company of Google, shocked investors in April by revealing over $7 billion in capital expenditures for the first quarter. Meanwhile, Facebook (FB), facing scrutiny over its management of the 2016 election, is aggressively investing in personnel and technology. Companies like Microsoft (MSFT), Intel (INTC), and Micron (MU) are also ramping up their capital investments.
Despite CEOs enthusiastically endorsing massive buybacks, they have been quietly opting for a different strategy with their personal investments. Corporate insiders sold a record $10.3 billion in shares in August, marking the highest level since November 2017, as reported by research firm TrimTabs.
UJ (New York) First published September 17, 2018: 3:14 PM ET
