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Goldman’s Buyback Doom Scenario Is Overdone

Goldman’s Buyback Doom Scenario Is Overdone

(Bloomberg Opinion) -- None other than Goldman Sachs is warning that the stock market would be in dire straits without buybacks. But it appears to take its doomsday scenario a little too far.

Late last week, Goldman’s strategists, lead by David Kostin, released a report saying that a lot of clients are asking about what would happen if Washington banned, or limited, companies from repurchasing their own shares. Goldman’s response: “Without company buybacks, demand for shares would fall dramatically.”

Goldman’s Buyback Doom Scenario Is Overdone

Buybacks are typically depicted as something like the market’s moving walkway, picking up the pace of returns and getting investors to their destination a little faster. Companies rush in when their shares are falling and keep the market moving forward. Goldman contends that halting buybacks would not only force investors to walk unassisted but would also be the equivalent of Washington sticking out its foot to trip up the market.

Goldman says stock repurchases pumped $509 billion into the market last year after adjusting for equity offerings and mergers and acquisitions. The only other net buyers of stocks last year were individual investors, who put in an additional $190 billion. On the other hand, pensions, mutual funds and foreign investors were all net sellers of stocks last year, collectively pulling $460 billion out of the market. Without buybacks, earnings-per-share growth for companies in the S&P 500 would slow by about 2.5 percent because share counts, the denominator in the EPS equation, wouldn’t shrink.

But Goldman’s buyback-bust scenario seems to miss the fact that the end of corporate buying could shift the cash to other purposes that would make the shares more valuable, like paying dividends, reducing debt or doing more of their acquisitions with cash. Companies have allocated about a quarter of the cash they spend each year to buybacks. Consider reducing debt. If companies switched the money they devoted to buybacks last year to paying down debt, the collective book value — assets minus liabilities — per share of the S&P 500 would have risen to roughly $906.85 a share from $847.93. The S&P 500 trades at just over 3.4 times book value. Based on that, using shares to pay down debt rather than repurchasing stock could push the S&P 500 to 3,083, or 7 percent higher than it is today.

Goldman’s Buyback Doom Scenario Is Overdone

At the same time, buybacks don’t seem to be providing the benefit that Goldman suggests they should. For instance, Goldman says the stock with the highest buyback yield — the boost that a stock should get from fewer shares — is Hewlett Packard Enterprise Co., which has a current “yield” of 14 percent. The problem is that HPE’s stock hasn’t risen 14 percent in the past year. In fact, it’s down 3 percent. And buyback stocks continue to underperform. Goldman’s group of high buyback yielders is up 15 percent, through April 4, or about 2 percent less than the S&P 500 overall.

Goldman’s dire warning on buybacks leaves little room to think that better fundamentals can also boost stock demand significantly. Companies would most likely find that investors would arrive just fine without the additional push.  

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

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