The Great Buyback Surge Is Over: Corporations Are Once Again Net Sellers Of Shares

Tyler Durden's picture

By now most are aware that the primary reason there was EPS growth last year (or the prior two years) was the relentless buying back of their own stock by corporate treasurers, accounting for 75% of the increase in S&P500 earnings per share even as revenues stagnated for the second year in a row and actual earnings growth was comatose at best.

At $500 billion in net stock buybacks in 2013, this was an immense amount of bidding power, equal to half of the Fed's entire annual liquidity injection. And while EPS was artificially boosted by an allocation of capital that most would say is the least efficient in terms of future growth (remember when companies spent on capital expenditures to fund long-term growth, not satisfy activist shareholders?) the only good thing that could maybe be said about the second highest annual corporate buyback in history was that companies still saw their stocks as cheap: after all, not even the most aggressive of CFOs would greenlight a massive buyback campaign if they expected their stock to plunge.

That is no longer the case.

As JPM's Nikolas Panigirtzoglou notes in his latest "Flows and Liquidity" weekly, "the S&P500 index Divisor rose in Q4 following a flattish pattern in the previous two quarters." This means that after buying back stock for rightly two years in a row, companies have once again turned to net sellers and as a result are increasing the divisor (aka the denominator in the EPS fraction) of the S&P500, which means two things: i) the boost to EPS from buybacks is now over and ii) even corporations view the market as overvalued and prefer to sell their stock rather than buy it.

This is how JPM's Panigirtzoglou see the development:

[One] measure of net equity withdrawal available on a higher frequency basis is the share count of equity indices. This share count is reflected in the so called “Divisor” of an equity index which roughly speaking is equal to the market value of the index divided by the price of the index. Divisor changes reflect changes in outstanding shares due to share buybacks or other corporate actions such as the ones mentioned above. But they also reflect addition or deletion of stocks to the index. If the S&P 500 closes at 1838 and one stock is replaced by another, after the market close, the index should open at 1838 the next morning if all of the opening prices are the same as the previous day’s closing prices. This is achieved with an adjustment to the divisor. 


The Divisor captures the collective impact of share buybacks, share offerings, exchange of common stock for debentures, conversion of preferred stock or convertible securities, as well as stock options and employee stock programs. The Divisor of the S&P500 Index is shown in Figure 1. This Divisor experienced a big decline between 2004 and 2008 due to strong buyback activity. Between 2004 and 2008 it fell by 7% or almost at a 2% per annual pace of decline. It rose after Lehman due to large share issuance especially by financials and a drying up of share buyback activity. It started declining again in 2011 as share buybacks picked up. Between Q3 2011 and Q1 2013 the S&P500 Index Divisor was down by 2.2%.


But the trend started changing in Q2. The Divisor was little changed in Q2 and Q3 last year and rose modestly in Q4. There is little doubt that the increased pace of equity offerings is to a large extent responsible for the reversal in the declining trend. IPOs were up 140% from a year ago in Q4 while secondary offerings were up by 100%.


In the past, the decline in the S&P500 Index Divisor was used as a reason to question the quality of Earnings-per-share data. Academic studies have found that managers tend to increase share buybacks in periods of slow earnings growth to boost EPS via shrinking the denominator, i.e. the number of shares. Indeed all of the increase in the quarterly S&P500 Operating Earnings-Per-Share between Q3 2011 and Q1 2013 was due to the decline in the Divisor. There was practically zero “real” earnings growth over that period.

And judging by the record number of negative earnings preannouncements there won't be any growth not only in Earnings in 2014, but in EPS as well, now that the S&P as an entity is collectively a seller of equity.

To summarize: tapering has begun and according to many the Fed's injection of flow will completely end by the late summer; Goldman just said the S&P is overvalued by every measure, and we just learned that corporations are once again net stock sellers. Oh, and let's not forget the worst monthly payroll number in nearly three years.


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Ned Zeppelin's picture

Corporate managers never saw their stock as cheap and thus a "good investment." The game was to maintain stock values (using super cheap money) to keep eps up and therefore keep their copious options in the green. No other motivation here. I would not be so sure that game is over since only JPM is dumb enough to think ( or beholden enough to continue the propaganda) that tapering means massive QE will end. It is the only thing keeping the game going, a substitute for actual, organic flow and growth in the economy. A respirator, if you will.

SafelyGraze's picture

I am a great believer in the future recovery engine represented by the world-class leadership and employee-engagement demonstrated by the various Publicly Traded Entities.

for this reason I am pleased to announce the Direct Outright Purchase of Equities (DOPE) program, through which we expect to acquire and monetize equities at the rate of 50 billion per month, going forward.

not only will DOPE be good for the Publicly Traded Entities that have self-invested by repurchasing shares of themselves, DOPE will be good for the general public by raising indexes to new, record levels.


BanksterSlayer's picture

Safely: I would like to participate in the DOPE program. Is there a social media company that I can buy into? I have heard there is great profit to be made from mindless internet chatter ... perhaps a company whose revenue stream is based on Users' bidding-per-character for the privlege of blabbering in increments longer than 140 characters?

Shad_ow's picture

You are participating.  What the FED finances you pay for, you just don't get the high, only the hangover.

U4 eee aaa's picture

you can rest comfortably in the fact that you are already broke and it is some poor kid three generations away that is paying for this

TruthInSunshine's picture

To add salt to the wound, the massive (there's empirical data supporting that it's on an unprecedented level) buybacks of shares were funded by debt instruments in the form of bonds & warrants (because, you know, the interest rate was sooo irresistibly low, man).

I first mentioned the 2.2 trillion in publicly traded corporate debt issuance in order to conduct stock share buybacks en masse right around 2010, when IBM sold a one year 3 billion dollar bond (for share buybacks) at 1% yield.

Another Bernanke fist pump!

Let's consider what hens come home to roost when the corporate revenue stream (and margin stream) dries up.

Bindar Dundat's picture

All bankster orchestrated!  Banks have $1.5T in excess reserves which at a 10:1 reserve ratio gives them $15 Trillion to play with.   

1) Banks loan for share buybacks! ($1T)

2) Fed begins Taper and stocks fall and markets crater 

3) Investment banks pick up the goodies cheaply!  

The Banksters then own it all :-(




Headbanger's picture

My guess is corporations were buying back their shares thinking there would be a lot of LBOs to grab assets or market share with cheap money especially in a no growth economy.

But now rates are  rising so the risk/reward on LBOs might not compute so well.

And corporations not feeling the threat of being taken over are starting to dump shares now cause they know full well equities are way over priced with head winds like Obamacare, higher rates, worsening employment, etc.

kridkrid's picture

tapering leads to the end of QE only if there is a plan to bring the house of cards down... and if there is a plan to bring the house of cards down, well, best of luck to everyone. And I certainly don't mean to imply that the house of cards can stay standing through QE, there is no way out. So, I guess, best of luck to everyone in that scenario as well.

buzzsaw99's picture

<--- leveraged buyback, take a bonus

<--- issue stock, pay off bonds, take a bonus

BandGap's picture

I don't use "good" or "bad" or "smart" or "stupid" to describe this anymore. It's all coreographed.  Goldman's admission of crap being over valued was just a CYA move. If there is anything that is transparent in the world today, it's that insiders know what is going on, people who pay attention know what is gojng on throogh watcing this farce and 99% of the population doesn't give a shit.

kwatinhu's picture

I don't think it's don't give a sh#t as much a clueless. Hey is Axemen on yet? You're surrounded by morons, in case you haven't noticed.

Fuh Querada's picture

"respirator" ... right.
Since 2009 there have been regular reports here on ZH on the theme "insider sellers outnumber buyers", and we have seen the effect on the stock indices.

garypaul's picture

Good point. Glad to see someone on ZH actually thinks.

new game's picture

stock buybacks>options>sale>avoidance of marginal tax-39.6 vs 20-thanks bush!

billions & billions of dollars

what more do you need to know?

new game's picture

only one question? is it tyme to buy physical irrationly and exuberantly?

double bottom

west to east

phys accum>production



weak to strong 

are we there?

just askin...

Let The Wurlitzer Play's picture

CEOs would NEVER do anything to reduce their stock/option values.  They are selling shares because they need the money.

new game's picture

in your opinion - what do they "need" the money for?

ArkansasAngie's picture

Surely you jest.  Their bonuses.

El Vaquero's picture

And their balance sheets.  But I suppose having a nice looking balance sheet helps with their bonuses too.

666's picture

A smart CEO would retire while the stock and EPS is at an all time high and sell their options before they tank. Let the next CEO get the blame for what is about to happen.

HardlyZero's picture

Retire at peak bernanke during the peak 'prosperity'.

Who will buy the small and mid-cap companies.

Will the Russell 2000 and S&P fall first, before the DOW ?

Shizzmoney's picture

This is one of the senior VPs did at my job.  He sold off 30K of his shares recently.

The punch bowl is waning.....coporates cannot prop up this faux market for infinity.  So they'll cash out before SHTF.

Let The Wurlitzer Play's picture

The same reason they needed money in 2009.  Please see chart and review history.  CEOs will NEVER do anything to adversly effect share/option prices until they absolutely have to.

IF this is a true infection point the "reason" will be obvious in six months.  Maybe this is a"blip" in the trend.  With the current US and global macro trends I am leaning towards an infection point.

Now please answer my question.  If corporation DONT need the money than why are they selling the shares????  If they think future revenue and profits will increse than they sould at least sit on their hands and hold what they have - that would be the prudent thin to do.  Actions speak louder than words.



Whoa Dammit's picture

It's all a game to keep the bonuses in the green.


Buy big blocks of your company's stock at $10.

Stock goes up to $11 on the buy. Outsiders pile in. Stock goes to $12.

Sell big blocks of your company's stock at $12. Outsiders sell  and stock falls to, $11.

Buy big blocks of your company's stock at $11. 

Wash. Rinse. Repeat. Never actually produce anything but still make a profit.




Solarman's picture

Ah, I misunderstood your statement earlier.  You are right, cash is a cushion that may not be there if the banks seize up again.

o2sd's picture

Every corporation has three potential sources of capital. Retained earnings, debt and equity. If earnings have flattened or declined, and debt is cheap, then you buy back equity so you can retain more earnings. That is, you swap equity for debt. If rates start to rise, then you need to do the opposite to service your debt.

The problem with this is that while the market for equity is broad and deep, all debt is a derivative of a monopoly issuer, the central bank, so when rates rise, all corporations who previously swapped debt for equity must now reverse the process all together (unless they have a high degree of expertise in hedging currency exposures in carry trade debt markets).

As always, in a race for the exits, he who starts first exits best.

buzzsaw99's picture

they do what they do because they are looting the company

BandGap's picture

Wouldn't you want to turn paper into something tangible? If I was these guys I'd take the money and ymething, anything.

Solarman's picture

LOL, as a former Fortune 500 executive, I can assure you of how wrong you are.  Everyone cashes out as much as possible, as soon as possible, or has collars built for them if they must stay invested.  Especially if a selloff is in the air.

ms8172's picture

In a strange way I am hoping that the earnings realeases start to miss badly next week!  WE need to expose this phony recovery from all of the lies from our media, government, and central banks, so people start to wake up!

When I look around America, I don't see any recovery.  I see more poverty and social unrest.  PERIOD!

philosophers bone's picture

My take is that Bernanke wanted a step down in Fed purchases to start on his watch for legacy purposes. I did not use the word taper as taper suggests that the next step will be a further reduction in Fed bond purchases and we are not even close to that happening.

Winston Churchill's picture

Without an audit, we only have their word for anything.

Psychopaths and sociopaths rarely, if ever , tell the truth.

In other words; its all bullshit , until the fat lady sings.

Beam Me Up Scotty's picture

Exactly!  They could be printing $850 billion a month, not $85 billion a month, and WHO WOULD REALLY KNOW?

Fuh Querada's picture

Jim Willie says $200 billion per month

garypaul's picture

Wait! I was just voting you up Winston. That's not my estimate of the printing!

El Vaquero's picture

As I've said multiple times, the Fed cannot end QE and the fed cannot not end QE.  We live in interesting times my friend. 

yrbmegr's picture

Another, more positive, way to look at this is that corporations are becoming interested in investing in things other than their own stock.

ArkansasAngie's picture

Such as?  Greek bonds? Real estate in Detroit?

mrdenis's picture

I've got a bridge to sell ya' about the GW bridge ..OH wait.....

ArkansasAngie's picture

All of these machinations did was kick the can down the road.  Their bet was that the can kicking process would reach to the other side of no growth.  


HardlyZero's picture

Hopefully they prepped and gold-plated the can and filled it with physical.

At the end of the road that can full-o'-gold may be important for everyone's survival.

Many companies may become their own fortress and support their own workers in some very few cases.

MarcusAurelius's picture

I wonder how many CFP's or Invenstment Speicalists as they call themselves these days are advising their clients based on data that we all just read from? 

I am sure that they will be proven right in the longer term if their clients "buy and hold"? I am net short in the short-term which could turn into a lot longer term than most of the talking heads think. 

Capitualating to one side of the market by all participants has always worked out well in the past hasn't it?

order66's picture

Bernanke's exit is the biggest tell of all. He's just following Greenspan's lead. Artificially drive the economy until the nightmare scenario is on the horizon and coming fast - then bail before you can get pegged with 100% of the blame.

And even if you do, who gives a shit, you're making $2m a year in the private sector.

Feel bad for the Middle Class. They're going to take another one in the ass after all is said and done.

The poor? Well, they pretty much have perma-dildo so just more of the same.

kwatinhu's picture

NO! Obamsey gonna take care of them Free Shit Army Rules!

hooligan2009's picture

market cap divided by number of shares in market = price of market? so the market price is 8900

and the latest earnings yield (from here = c. 6%,

the market cap is 17.5 trillion (from here, daily fact sheet mean times 500 - )

which means that S&P500 reported earnings are c. 1 trillion dollars (17.5 x 6% = 1,050 bn)

ok, the point here is that these reported earnings are not real earnings and the analysis is not tax adjusted. if a company avoids tax there are earnings that get taxed once the tax break expires. the majority of tax breaks are carried forward losses from 2007/2008 in the FIRE, these tax breaks expire as profits wipe them out. next year will be the first time companies have paid tax for a number of years, though of course the banks wont have to pay their full whack for a few years yet as they still have carried forward losses and losses (litigation costs) that can be carried forward.

the share buy back is part of the story, does anyone have numbers on how much treasury stock has been released (sold back to market) by companies during tough times or for "efficient tax management?


here#s some stuff to think about

US corporate tax rate = 40% (from here with a country comaprison -

so we should be seeing taxes of 40% times 1 trillion = 400 billion

total business taxes paid = 500 billion from here which is economy wide and not for S&P500

total corporate taxes paid in 2013 = 347 billion from here and 237 billion for 2012

tax breaks last year cost $180 billion..according to this


enloe creek's picture

didn't know this but I read the banks money reserves at the fed cannot be removed unless they sell the treasuries back to the fed. doesn't make much difference til the bank has enough reserves elsewhere to allow them to trade in treasuries but what if bonds fall . the fed will make a big profit on the banks losses. that would be a nice little meeting to be a fly on the wall at.

starman's picture

Face if gents Capitalism is stuck in reverse on a hill! Over evaluation of assets by QE is not growth! No growth = no profit = no bread!
Game over!