Share buybacks have surged, a sign that U.S. companies are bullish on the U.S. economy.
According to Deutsche Bank research, companies have announced more than $383 billion in share buybacks in the past 13 weeks, up 30% from the same period last year and the most since June 2018. That total includes Apple’s $110 billion share repurchase plan, which would be the largest buyback in history.
Deutsche Bank’s equity strategy team points out that the “boom” in buybacks isn’t just limited to big companies like Apple (AAPL) and Alphabet (GOOG, GOOGL), which just announced $70 billion in share buyback plans: Of the $262 billion in buybacks reported during the first quarter earnings season, $82 billion was by companies outside of the big tech companies.
This is a welcome sign for those hoping the stock market rally will extend.
“Share buybacks have become the biggest driver of equities over the medium term,” Binky Chadha, chief equity strategist at Deutsche Bank, told Yahoo Finance ahead of the company’s first-quarter earnings release.
To Chadha, the importance of share buybacks is simple: They communicate to investors how a company feels about the macro environment.
Share buybacks typically increase when earnings rise, Chadha said. That’s because profits, which are currently rising at their fastest pace in about two years, increase companies’ cash flow. Companies can use that cash flow to pay bigger dividends to shareholders, reinvest in the company through increased capital expenditures, or buy back shares to return capital to shareholders.
This trend did not materialize in 2023. Profits increased, but share buybacks did not. Chadha reasoned that this was likely related to the fact that the vast majority expected the U.S. economy to suffer a recession.
“If the macroeconomic consensus is for a severe slowdown or recession, companies won’t buy back stock,” Chadha said. “Companies will hold on to cash.”
But the macro consensus is shifting: Economists and macro strategists are becoming more optimistic about U.S. economic growth this year, and companies are backing that confidence with stock buybacks.
“What you saw was [fourth quarter] “We saw share buybacks really start to pick up in earnings calls earlier this year,” Chadha said. “So the clouds of cyclical pressure are starting to lift. Companies are feeling more comfortable about the outlook.”
Elise Ozenbaugh, global investment strategist at JPMorgan Private Bank, said increased buybacks provide a “good foundation for investors” because they help support the market by allowing companies to buy back their own shares, even if retail investors aren’t pouring money into stocks.
The story continues
Going a step further, Ozenbaugh believes buybacks are just part of the evidence that companies are building up first-quarter profits, increasing their cash flow, and using it in ways that ultimately benefit shareholders, such as boosting capital spending for big tech companies.
“[Boosted capex is] “These trends that have been so instrumental to the market, like AI, are going to continue to gain momentum,” Ozenbaugh told Yahoo Finance.
In this June 16, 2020 file photo, the sun shines on Apple’s Fifth Avenue store in New York. (Associated Press/Mark Lenihan, File) (Associated Press)
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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