(Bloomberg) – The recent rise in interest rates may make some investors nervous, but it is unlikely to prevent a buying stock among the biggest whales in the stock market: corporations themselves.
U.S. companies’ swollen cash stacks and a rosy outlook for earnings raise the expectation that more executives will follow in Warren Buffett’s footsteps and unleash a stock buyback rush, adding some support to the stock market after the buybacks dropped last year. At the very least, the purchases could help offset the increase in stock offerings this year through a march of publicly traded specialty companies and a record number of secondary offerings.
“If you see cash flow accelerate, you see that buybacks follow shortly thereafter,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence. “There’s a huge amount of cash sitting there and can’t go anywhere.”
S&P 500 companies entered more than $ 2.2 billion in cash this quarter, and Wall Street predicts earnings growth of 24% in 2021, according to data compiled by Bloomberg.
Repurchases among companies in the benchmark index have already given signs of recovery. Repurchases have risen to $ 120 billion in the last three months of 2020, according to data compiled by Bloomberg, up 28% from the previous quarter. For the first time since the Covid-19 crisis, more than half of the index bought back shares. Nevertheless, repurchase activity remains well below the $ 197.7 billion pre-pandemic levels recorded in the first three months of 2020.
If repurchases were to return to average levels over the five years before 2020, repurchases would expand by nearly 50% in 2021, according to Adams. In a survey conducted by RBC Capital in mid-March, about 60% of analysts said buybacks are a priority for management teams that want to use money. Only dividends received a higher score of 76%, the bank’s head of US equities strategy, Lori Calvasina, said in a note to clients.
“U.S. equities will be strong in 2021, supported by a recovery in buybacks, solid dividends, a recovery in margins and strong economic fundamentals,” she writes, noting that expensive valuations are likely to limit gains.
Muted effect
Not everyone is clumsy about the buyback effect. While repurchase activity will increase this year, it is unlikely to reach levels seen before the pandemic, thanks to the high price-to-earnings multiplicity and declining investor enthusiasm for repurchases, according to stock strategist Bank of America Corp. Increasing corporate purchases will also be dampened by a boom in companies raising money by selling shares, Hall said in an interview.
The bank’s business clients bought back $ 3.7 billion worth of shares last week, the second highest total on record, Hall and her colleague Savita Subramanian wrote in a research note. The purchases were led by technology companies, but sectors such as healthcare, consumer discretionary and financial matters accelerated the purchases.
Technology companies, many of which have seen a boom in the business over the past year, have remained steady in their purchases with other industries. Tech accounted for 44% of the total repurchase in the S&P 500 in the fourth quarter, compared to 27% in the same period a year ago. Sectors that drastically reduce buyback operations, such as the discretionary consumer of the consumer and the industry, plan to take up more shares as earnings improve, Adams of Bloomberg said.
Top buyer
The biggest buyer was Apple Inc. The technology giant bought back $ 24.8 billion worth of shares last quarter, more than the next four largest buyers combined, according to Bloomberg data. The iPhone maker could set the tone next month when it usually updates investors on its capital return plans, along with fiscal earnings in the second quarter.
Of course, some investors frown on companies that put cash to work and buy their own shares, rather than investing in things like acquisitions or research and development. However, even Buffett is a fan these days. The head of Berkshire Hathaway Inc., which has been critical of buybacks in the past, spent more than $ 24.7 billion of its company’s cash on buybacks in 2020, praising Apple’s purchase for Berkshire’s stake in the to enlarge company.
Berkshire Hathaway continued to take up its own shares in 2021 and is likely to buy more, the billionaire investor wrote in his annual shareholder letter last month.
“The process provides a simple way for investors to own an ever-increasing share of extraordinary businesses,” Buffett said before quoting Mae West as saying, “Too much of a good thing can be … amazing.”
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