Buybacks are surging. After cratering in the first half of 2020, buybacks have increased six quarters in a row and are poised for a record year.
S&P 500 stock buybacks:
Q1 20: $199 billion
Q2 20: $89 billion
Q3 20: $102 billion
Q4 20: $131 billion
Q1 21: $178 billion
Q2 21: $199 billion
Q3 21: $234.6 billion
Q4 21 (est.) $238 billion
Source: S&P Dow Jones Indices
At nearly $850 billion, total buyback volume for 2021 would exceed the record $806 billion seen in 2018.
Fueling the surge: financials and technology
The bulk of buybacks are concentrated in a small group of companies. The top five accounted for almost 30% of the buybacks in the third quarter. Four of the five are technology companies.
Buyback monsters
(largest buybacks, Q3 2021)
Apple $20.4 billion
Meta Platforms $15 billion
Alphabet $12.6 billion
Bank of America $9.9 billion
Oracle $8.8 billion
Source: S&P Dow Jones Indices
Why are buybacks so concentrated in tech companies? They are the companies that have the largest cash flows, which enables them to buy back stock.
Financials have made a return this year to the buyback list because so many have been returning excess capital. American Express and Morgan Stanley have also executed large buybacks this year.
Do buybacks benefit the investor?
Buybacks that do not also reduce share count do not benefit investors, because it is the reduced share count that improves the earnings per share, which is what investors want.
But many companies announce buybacks even as they give out new options to executives and other employees, which does not reduce share count. Those executives and employees are exercising those options.
It’s like draining a swimming pool (buying back stock) and filling it up at the same time with a hose (creating new stock through options).
The result, often, is a wash. The total share count for the S&P 500 is slightly higher today than it was in 2018.
S&P 500: shares outstanding
2018 $300 billion
2019 $296 billion
2020 $312 billion
2021 (YTD) $306 billion
Source: S&P Dow Jones Indices
There’s an additional reason buybacks are not generating share count reductions despite record amounts of money spent: buybacks are executed in dollars, not shares bought back, but the S&P 500 is up almost 50% since the end of 2019.
“The impact on share count remains significantly lower compared to previous years as higher stock prices have reduced the number of shares companies can buy back with their current expenditures,” Howard Silverblatt, who tracks buybacks as senior index analyst for S&P Dow Jones Indices, said in a recent note to clients.
The bottom line, according to Silverblatt: “Share count has increased, despite the fact that over $2 trillion has been spent on buybacks since the end of 2018.”
Here are the companies that really do decrease their share count
Some companies really do reduce their share count using buybacks and have significantly improved their earnings per share as a result, including some of the largest tech companies.
Buyback monsters
(share count reduction since 2018)
Apple 19%
Alphabet 9%
Facebook 1%
Oracle 35%
Microsoft 3%
2022: another record year?
With the consumer still strong and corporate profits expected to be up at least 10% in 2022, buyback watchers see the potential for another record year in 2022.
“The record buyback pace displayed in the second half of 2021 will likely continue into 2022 as U.S. companies find their balance sheets stuffed with cash entering the new year,” Ben Silverman, the director of research at InsiderScore, told me.
SIlverblatt agrees, but with a caveat: “Companies are expected to increase expenditures, which is needed for the higher priced shares, but not enough to impact share count.”
Should buybacks be taxed?
The enormous sums spent on buybacks has fueled outrage in Washington, where many have long complained that buybacks do little but enrich management.
President Joe Biden’s Build Back Better plan has a proposal for a 1 percent excise tax on buybacks. The new tax is estimated to generate revenues of $124 billion over 10 years, but is currently stalled in negotiations.
The Tax Policy Center has argued that buybacks provide a lower tax burden for corporations because they allow for greater deferral of capital gains. “Since share buybacks help avoid investor-level taxation, the buyback tax is a reasonable way to reduce the tax advantage,” the center said.
