Friday, March 3, 2023
- Buybacks are back after most companies suspended share repurchase programs in the wake of the pandemic. Total S&P 500 buybacks jumped from $513 billion in 2020 to $918 billion in 2022.
- From a pure performance perspective, the S&P 500 Buyback Index has historically provided excess returns over a long-term investment horizon, including notable outperformance over dividend growth stocks.
- Rising free cash flows should continue to support buybacks this year. However, Washington’s new 1% tax on net buybacks, rising interest rates, and the prospect of a recession could negatively impact repurchase activity. In addition, buybacks are also competing with a ramp-up in corporate capital expenditure spending.
- The technical setup for the S&P 500 Buyback Index remains bullish and points to continued relative outperformance over the S&P 500.
Share repurchases were cast into the spotlight this week after Warren Buffet pushed back against recent political criticism of corporate buyback programs. The “Oracle of Omaha” penned a rebuttal in his closely watched annual letter to Berkshire Hathaway shareholders where he emphasized that gains made from ‘value-accretive repurchases’ benefit all owners and not just CEOs. Buffet further added more colorful commentary aimed at critics, stating, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).” The pushback comes after President Biden’s State of the Union address last month, where he criticized corporate buyback programs and proposed a plan to quadruple the new 1% tax on share repurchases.
We will leave the debate over the benefit of buybacks between Washington and Omaha and look at share repurchases from a performance perspective.
The chart below shows the long-term performance of the S&P 500 Buyback Index compared to the S&P 500, S&P 500 Equal Weight, and S&P 500 Dividend Aristocrats indexes. For reference, the S&P 500 Buyback Index represents an equally weighted and quarterly rebalanced basket of the top 100 stocks with the highest buyback ratio (cash paid for common shares during the last four calendar quarters divided by the total market capitalization of common shares). The S&P 500 Dividend Aristocrats Index measures the performance of S&P 500 constituents that have consistently increased dividends for at least 25 consecutive years.
The S&P 500 Buyback Index has widely outperformed over the last several decades, amassing a price return of 2,328% since 1995, more than doubling the returns of the other indexes. For additional context, the total return of the S&P 500 Buyback Index during this period was 2,763%, compared to total returns of around 1,400% for the other indexes. From a pure performance perspective, the data shows that buybacks have historically provided excess returns over a long-term investment horizon, including notable outperformance over dividend growth stocks.
What Sectors are Buying Back Stock?
Buybacks are back after most companies suspended share repurchase programs in the wake of the pandemic. Total S&P 500 buybacks jumped from $513 billion in 2020 to $918 billion in 2022. According to S&P Dow Jones Indices estimates, buybacks on the S&P 500 will likely exceed $1 trillion in 2023.
The chart below breaks down total buybacks across the S&P 500 sectors since 2020. Technology companies have dominated buyback activity, including nearly $250 billion of share repurchases recorded last year. Technology will likely have another big buyback year in 2023, along with energy, communication services, financials, and health care.
Follow the Money
Rising free cash flows should continue to support buybacks this year. However, Washington’s new 1% tax on net buybacks, rising interest rates, and the prospect of a recession could negatively impact repurchase activity. In addition, buybacks are also competing with a ramp-up in corporate capital expenditure (Capex) spending, as shown in the chart below.
The S&P 500 Buyback Index is trending higher after breaking out from a bottom late last year. The recent pullback from overbought levels has found support near a developing uptrend and the 50-day moving average. We believe the recent weakness represents a buying opportunity.
Relative strength also remains bullish. The S&P 500 Buyback Index vs S&P 500 Equal Weight (SPW) ratio chart remains in an uptrend with positive momentum, suggesting the trend of buyback outperformance will likely continue.
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