A longtime friend and notable business TV personality (we don’t name drop, but you certainly know him) recently emailed us to ask for an update on US equity stock buybacks. If he’s interested enough to hear more, chances are good this will soon be an important market narrative.
Let’s start by setting the stage with a few basic facts using S&P’s data for the companies of the S&P 500:
- Share buybacks totaled $198.7 billion in Q1 2020. This was actually down 3.4% from the year-ago level ($205.8 billion) but up 9.4% from Q4 2019 ($181.6 billion).
- “Peak buyback” was in Q4 2018, at $223.0 billion. The trough for the current/past cycle was, unsurprisingly, in Q2 2009 at $24.2 billion.
The takeaway here is that Q1 2020’s pre-COVID snapshot of normal buyback levels is very much a peak-y number, at essentially $200 billion/quarter.
The big questions now are 1) how much of a drop should we expect from that $200 billion/quarter run rate and 2) what effect will reduced buybacks have on stock prices? One can paint a pretty dire picture given what will no doubt be bad Q2 2020 earnings reports and an uncertain 2H 2020. Buybacks have been among the only real sources of demand for US stocks over the last decade and, with repos now either out of fashion or just plain unaffordable, a highly valued US equity market may be at risk of another tumble.
There’s 2 ways to slice the data in search of some answers.
The first is to just look at the 20 S&P 500 companies that spend the most on buying back their own stock, because these are a surprisingly large percentage of total buyback dollars:
- In Q1 2020 these 20 names spent $92.8 billion on buybacks, which is almost half (46.7%) of total S&P 500 buybacks in dollar terms. This quarter was not an anomaly: the same 20 names were 45% of all S&P 500 buybacks in Q4 2019 and the 4 quarters ending Q1 2020.
- There are 6 Financials in this top 20 list: JP Morgan ($6.5 billion in Q1 2020 buybacks), Bank of America ($6.4 billion), Wells Fargo ($3.7 billion), Citigroup ($3.3 billion), Goldman ($2.7 billion), and Morgan Stanley ($1.8 billion).
The Q1 2020 buyback total here was $24.4 billion (12% of all S&P 500 buyback dollars spent), and for the 4 quarters ending Q1 2020 the total was $101.8 billion (14% of the total).
- There are also 9 Tech/Communication Services stocks on this list: Apple ($18.8 billion in Q1 2020 buybacks), Google ($8.5 billion), AT&T ($5.5 billion), Microsoft ($7.1 billion), Intel ($4.2 billion), Oracle ($4.0 billion), Visa ($3.1 billion), Charter Communications ($2.4 billion) and Facebook ($1.9 billion).
The Q1 2020 buyback total here is $55.4 billion (28% of the S&P 500’s buyback spend) and the trailing 4 quarter total is $191.8 billion (27%).
Of all these names, only two have suspended their buybacks outright (Intel and AT&T) although we won’t know how much any of the others have slowed their repurchase pace until they report Q2 earnings.
Takeaway: we can definitively say that the S&P 500’s buyback run rate will be down by at least $24 billion/quarter (big banks) and $9 billion (Intel and AT&T), or down by 17% versus Q1 2020, even before we see what other companies are doing. At the same time, there seems little doubt that Apple, Microsoft and other Tech companies are well positioned to keep buying back their stock.
The second approach is to look at entire sectors; 4 industry groups made up 74% of all buyback dollars in Q1 2020:
- Technology: 29.8% of all S&P 500 repo dollars
- Financials: 23.5%
- Health Care: 10.5%
- Industrials: 10.4%
- The rest of the sectors are: Consumer Discretionary (8.1%), Consumer Staples (2.7%), Energy (1.9%), Materials (2.3%), Real Estate (0.7%), Communication Services (10.1%) and Utilities (0.2%)
Takeaway: given decent fundamentals we can safely expect Tech and Health Care buybacks to hold up, but Industrial companies will certainly have to curtail their repos and the bank portions of the Financials space will be a zero.
After looking at this data through both lenses, our best guess is that the S&P 500’s buyback run rate for the rest of 2020 is around $50 to $75 billion/quarter. By way of comparison:
- That is still 2-3x the Q2 2009 trough of $24 billion, driven by the fact that Q2 2020 corporate profitability is far better ($23/share for the S&P 500) than Q4 2008’s breakeven result.
- In line with 2010 buyback levels, when corporate confidence was solidly on the mend post Financial Crisis.
- Much less than the $119 billion in S&P 500 dividend payments made in Q2 2020, which we assume will be the run rate for 2H 2020.
Summing up: we’re not especially worried that buybacks will decline dramatically in 2020, because history clearly shows that stocks bottom when buybacks bottom. This happened in 2003 and again in 2009; our bet is it will happen again in 2020. The S&P chart below shows this well, and it is a good place to conclude.