It has been one of the sweetest deals on Wall Street: Investors relinquish their shares for a premium to the market price, paid in cash, often helping raise the stock’s value. But this longtime perk of a bull market appears to be fading.
Share buybacks are on course to drop 16% in 2019 for the S&P 500, versus the year before, according to a Goldman Sachs study sent to clients. And in 2020, the survey added, share repurchases will dip another 5%. Certainly, buyback activity is still strong relative to history: The $754 billion expected for this year still would be the second largest ever, with last year’s $895 billion holding the record.
But the trend is down, Goldman noted. The culprits, the study read, are “heightened uncertainty, low CEO confidence, and tepid earnings growth.” This all comes amid an overall cut in corporate spending. Total cash outlays for 2019’s first half slid 4%, the firm said.
Thanks to the trade war and weakening economics overseas, not to mention a retreat in US manufacturing growth, American companies expect much lower earnings for the third quarter, whose reporting period has just begun. Meanwhile, a Duke University survey recently found that a majority of chief financial officers expect the US will be in a recession within the next year.
Some spending activities will nudge up in 2019, Goldman found. Notably, dividends will grow by 5%, the firm forecasted. These payouts are another way companies reward shareholders with cash. Dividends have a sanctity that buybacks don’t. Trimming dividends is always a red alert that a company is in trouble, and poisons its share appreciation.
Buybacks have taken a lot of political heat lately, with Democrats eyeing ways to require companies to pare their repurchases. The rap on buybacks is that the money could be better spent on worker raises and expansion that leads to more jobs. This, to be sure, is a controversial position, with buyback proponents saying investors should reap benefits beyond rising stock prices and that the extra cash in their hands boosts the economy.
Among corporate sectors, health care has seen the steepest buyback decline, down 29% in the first half. Small wonder: The health industry is taking the most flak from Congress these days.