Add surging corporate share repurchases to the list of worrisome economic signals for 2019.
U.S. companies announced a record $1 trillion in buybacks this year, according to a recent report from Trim Tabs Investment Research. That’s 28 percent more than the previous record of $781 billion in 2015.
Local companies are doing their part to fuel the rise. Chicago-based aerospace manufacturer Boeing on Tuesday boosted its buyback authorization to $20 billion. Last week, North Chicago-based drugmaker Abbvie authorized an additional $5 billion, for a total of $15 billion. Heavy equipment manufacturer Caterpillar, based in Deerfield, approved a $10 billion repurchase program this year, after abstaining for two years. Deerfield neighbor Walgreens Boots Alliance authorized the same amount at midyear.
Executives may hope markets will interpret rising buybacks as a sign of confidence. Theoretically, companies buy their own stock when management believes business prospects are better than share values indicate. In other words, they expect stronger fundamental performance to lift the shares.
Real-world experience suggests otherwise. First of all, companies are notoriously bad stock pickers. Studies show they tend to buy back shares at highs, not lows. Secondly, other research indicates companies that repurchase lots of stock generally underperform those that don’t buy back their own shares.
Dig a little deeper, and buybacks appear to reflect not optimism in the C-suite, but anxiety. Keep in mind that share buybacks, like any expenditure, are capital allocation decisions. When executives decide to spend $10 billion on buybacks, they’ve concluded that investing the same amount in business operations would be a poorer use of capital.
Corporate honchos turn to buybacks as a defensive measure during times of uncertainty. Share repurchases soared in the years of sluggish growth that followed the deep recession of 2008-09. CEOs lacked confidence in demand, so they bought back shares instead of wagering on an economic rebound.
Buybacks take the risk out of capital allocation. There’s no guarantee that a dollar invested in new products, geographic expansion or factory capacity will produce an acceptable return. Share buybacks, by contrast, almost always bolster the number CEOs care about most: earnings per share. Reducing share count lifts EPS, even if actual earnings stagnate or decline. And that props up share prices, which are based on EPS.
To be sure, this year’s rise in buybacks is in part a result of tax cuts that left companies with bulging cash hoards. But corporate America evidently couldn’t find enough promising investment opportunities for the extra cash.
And when companies spanning so many industries decide buybacks are their best bet, it’s a sign of low expectations across the economy. Indeed, that seems to be the view from many corner offices as interest rates rise, trade tensions escalate, and stock markets around the world plummet. These trends trouble execs in sectors ranging from energy and transportation to banking and manufacturing. A survey of CFOs by Duke University recently found that about half the respondents expect the U.S. to be in recession by the end of next year.
With such glum expectations, it’s no surprise that so many companies are playing it safe and buying back shares.