Corporate America Primed to Join Warren Buffett in Buyback Binge

The recent rise in interest rates may be causing nervousness among some investors, but it’s unlikely to prevent a buying binge among the biggest whales in the stock market: Corporations themselves.

U.S. companies’ swollen cash piles and a rosy outlook for earnings are raising expectations that more executives will follow in the footsteps of Warren Buffett and unleash a spree of share repurchases, adding a layer of support to the stock market after buybacks plummeted last year. At the very least, the purchases could help offset a surge in supply of shares this year by a parade of special acquisition companies going public and a record number of secondary offerings.

“When you see cash flow accelerate, you see buybacks follow shortly thereafter,” said Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. “There’s a tremendous amount of cash sitting out there with nowhere to go.”

S&P 500 companies entered this quarter with more than $2.2 trillion in cash and Wall Street is projecting 24% earnings growth in 2021, according to data compiled by Bloomberg.

Repurchases among companies in the benchmark index have already shown signs of rebounding. Buybacks rose to $120 billion in the last three months of 2020, up 28% from the previous quarter, according to data compiled by Bloomberg. For the first time since the Covid-19 crisis, more than half of the index bought back shares. Still, buyback activity remains well below pre-pandemic levels of $197.7 billion recorded in the first three months of 2020.

Corporate America Primed to Join Warren Buffett in Buyback Binge

Should buybacks return to average levels over the five years prior to 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 looking to deploy cash. Only dividends received a higher score of 76%, the bank’s head of U.S. equity 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 fundamental support,” she wrote, while also noting that expensive valuations will probably limit gains.

Muted Effect

Not everyone is bullish on the buyback effect. While repurchase activity is poised to increase this year, it’s unlikely to reach levels seen before the pandemic thanks to high price-to-earnings multiples and waning investor enthusiasm for buybacks, according to Bank of America Corp. equities strategist Jill Carey Hall. Rising corporate buying will also be muted by a boom in companies raising money by selling shares, Hall said in an interview.

The bank’s corporate clients repurchased $3.7 billion of shares last week, the second highest total on record, Hall and her colleague Savita Subramanian wrote in a research note. The buying has been led by technology companies but sectors like health care, consumer discretionary and financials have accelerated purchases.

Technology companies, many of which saw business boom over the past year, have remained steadfast in their buying relative to other industries. Tech accounted for 44% of total buybacks in the S&P 500 in the fourth quarter, up from 27% in the same period a year ago. Sectors that drastically cut buyback activity, such as consumer discretionary and industrials, are poised to snap up more shares as earnings improve, Bloomberg Intelligence’s Adams said.

Top Buyer

The biggest buyer by far has been Apple Inc. The technology giant bought back $24.8 billion of shares last quarter, more than the next four biggest buyers combined, according to Bloomberg data. The iPhone maker could set the tone next month when it typically updates investors on its capital return plans in conjunction with fiscal second-quarter earnings.

Of course, some investors frown upon companies putting cash to work buying their own shares rather than investing in things like acquisitions or research and development. However, even Buffett is a fan these days. The Berkshire Hathaway Inc. chief, who in the past has been critical of buybacks himself, spent more than $24.7 billion of his company’s cash on repurchases in 2020 and praised Apple’s buying for increasing Berkshire’s stake in the company.

Berkshire Hathaway has continued to snap 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 offers a simple way for investors to own an ever-expanding portion of exceptional businesses,” Buffett said before quoting Mae West: “Too much of a good thing can be ... wonderful.”

©2021 Bloomberg L.P.

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