S&P 500 firms cut share repurchases by a projected $40
billion in second quarter
By Jessica Menton
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 22, 2019).
U.S. corporations are repurchasing their own shares at the
slowest pace in 18 months, a potential sign of more volatility as
the buyback bonanza from the corporate-tax overhaul wanes.
Companies in the S&P 500 repurchased about $166 billion of
their own stock in the second quarter, S&P Dow Jones Indices
projects, down from $205.8 billion in the first quarter and $190.6
billion in the same period a year ago. That marks the lowest total
since the fourth quarter of 2017 and the second consecutive quarter
of contraction.
What alarms some investors is that companies eased up on share
repurchases even as volatility surged amid a trade dispute between
Washington and Beijing.
The S&P 500 slumped almost 7% in May, but the buyback data
suggest companies didn't step in to support their stock prices the
way they did during the final months of 2018.
That is a sign that corporations are potentially tightening
their wallets as executives grapple with new tariff threats in the
long-simmering trade dispute with China; weakening corporate
earnings; signs of a downturn in global growth and uncertainty over
the Federal Reserve's interest-rate policy.
Apple Inc., Cisco Systems Inc. and Amgen Inc. were among the
biggest spenders on corporate buybacks in the second quarter, but
all three slowed spending from the first quarter and year over
year.
"Given the greater uncertainty in terms of trade, weaker growth
overseas and the potential for an economic slowdown in the U.S., I
wouldn't be surprised to see companies hold on to more cash over
the next several months before there's greater clarity on the
outlook for the economy and financial markets," said Michael
Sheldon, chief investment officer of RDM Financial Group at
HighTower.
Despite spurts of volatility, the S&P 500 is still up 17%
for the year -- and within 4% of last month's record high.
Companies and investors often cheer share repurchases because
they boost per-share earnings and often stock prices. But others
argue those funds are better spent on long-term investment
projects, such as building factories or on research and
development.
Corporate capital expenditures have slowed this year, adding to
worries that economic growth is fading. Many executives have said
the lingering trade tensions with China are giving them pause. The
latest data from S&P Dow Jones Indices indicate capital
expenditures picked up in the second quarter, improving 5.2% from
the first three months of the year but still 7.8% below the boom
seen at the end of last year.
The willingness among companies to buy back their shares has
been among the biggest driving forces of the decadelong bull
market. Since 2013, U.S. companies have poured $4.2 trillion into
stock buybacks, according to Bank of America Merrill Lynch.
Investors, though, haven't shown the same enthusiasm for stocks.
Mutual funds and exchange-traded funds tracking U.S. equities have
posted $84 billion in outflows over the same period, according to
the bank's analysis of EPFR Global data.
Corporate buybacks boomed after the U.S. tax overhaul in
December 2017, with every quarter in 2018 marking a new high for
share repurchases. The recent easing in activity has some analysts
and investors questioning whether the shift marks a return to the
norm, or if companies are pulling back the reins for other
reasons.
"The sugar high might have subsided for buybacks," said Howard
Silverblatt, senior index analyst at S&P Dow Jones Indices.
"The third quarter will be telling regarding how companies reacted
to more market volatility and uncertainty. If companies didn't
increase their buying in May, what are they doing now amid more
volatility?"
The pullback in spending was broad across industries: Six of the
10 companies that spent the most on buybacks in the second quarter
reduced spending from the first three months of the year. Some
analysts said that seasonality could be a factor but still called
declines notable.
Technology companies, which accounted for more than a third of
the buybacks in the second quarter, spent roughly $52 billion, down
23% from the first three months of the year and 18% from last year.
Apple, the biggest spender among all the companies in the S&P
500, slowed its purchases to $18.15 billion from $23.81 billion in
the first quarter.
Networking-equipment maker Cisco has also pulled back. "We're
going to get back down to our normal strategy, which is being very
opportunistic when our stock's down...and buying, but really
balancing between both the dividend and the buyback to be at least
50% of our free cash flow," Kelly Kramer, Cisco's chief financial
officer, said on the company's earnings call last week.
Cisco shares are up 13% in 2019 but have slumped 12% in August
after the company cut its growth forecast, partly because of
weakness in China.
Apple, meanwhile, has surged 35% this year and is essentially
flat for the month.
Buybacks have faced opposition on Capitol Hill. Democratic
presidential candidates have signaled that they want to restrict
how much stock U.S. companies can buy back, arguing that buybacks
enrich shareholders at the expense of workers. And Republican Sen.
Marco Rubio of Florida unveiled a proposal this year to change how
investors are taxed when companies buy back shares.
"We're going into an election cycle next year that carries a
huge amount of uncertainty for financial markets and the direction
of our economy," said Patrick Healey, founder and president at
Caliber Financial Partners. "It behooves companies to sit on more
cash in light of that additional uncertainty."
Write to Jessica Menton at Jessica.Menton@wsj.com
(END) Dow Jones Newswires
August 22, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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