Stock Buyback Plans Drop To 5 Year Low

The value of stock buyback announcements from U.S. companies slowed to its lowest level in nearly five years, dropping to a fresh nine quarter low, TrimTabs Investment Research said on Monday, potentially jeopardizing one of the main drivers of the rising stock market.

TrimTabs calculated that buybacks rebounded to $59.9 billion in September from a 3½-year low of $21.5 billion in August, but two-thirds of last month’s volume was due to a single buyback by Microsoft.  The 39 buybacks rolled out last month was the lowest number in a month since January 2011.

“Buybacks have been trending lower for the past two years, which is a cautionary longer-term signal for U.S. equities,” said Winston Chua, analyst at TrimTabs.  “Along with central bank asset purchases, buybacks have been a key pillar of support for the bull market.” Somewhat surprisingly, the decline in buybacks takes place even as corporations issue record amounts of debt which in previous years was largely put toward stock repurchases but is increasingly going to fund maturing debt due to a rising rollover cliff in the coming year. 

The U.S. stock market isn’t likely to get as much of a boost from buybacks as it did in recent years,” noted Chua.  “Apart from big tech firms and the too-big-to-fails, fewer companies seem willing to use lots of cash to support share prices.

One month ago, David Santschi, chief executive officer of TrimTabs, warned that "buyback activity has been disappointing in earnings season", a trend that has persisted in the coming weeks. "The reluctance to pull the trigger on share repurchases suggests corporate leaders are becoming less enthusiastic about what they see ahead."

Underscoring the importance of buybacks to the recent rally was the latest note from Goldman's David Kostin, who observed that foreign investors and mutual funds sold $46 billion and $19 billion of equities in 2Q 2016. In contrast, corporations and households purchased $174 billion and $87 billion, respectively.

Drilling down, "corporate buybacks will remain the largest source of US equity demand this year. However, we expect share repurchases will be lower in 2H 2016 vs. 1H given reduced repurchase authorizations and weaker buyback activity in 3Q."

Our buyback desk estimates that gross share buybacks in 3Q 2016 will be 15% lower than in 2Q 2016. In addition, S&P 500 share repurchase authorizations equal $335 billion this year vs. $454 billion at the same time in 2015.

Don't expect a pick up in actual buyback activity over the next few weeks either: according to the Goldman, "next week, more than 75% of S&P 500 firms will be in the pre-3Q earnings season buyback blackout period."