Tailwind from US share buybacks is weakening

published 16 November 2018

922_MW_P06_Markets_Bottom — Buffett: even the Sage of Omaha is buying back stock

"When even the Sage of Omaha is doing it, the trend for companies to buy back their own shares seems unstoppable," says the Financial Times. Warren Buffett's investment vehicle Berkshire Hathaway bought back $928m of its own shares in the third quarter. And this is just the tip of the iceberg. S&P 500 companies are set to buy a record $900bn worth of their own stock this year. "The sheer volume of buybacks across corporate America should be ringing alarm bells."

Last November, US president Donald Trump introduced tax changes that incentivised businesses to repatriate capital they were holding abroad. Billions of dollars of profits came back on shore as a result. But instead of investing this windfall into new ventures, it seems companies have largely chosen to buy their own shares even as buybacks hit record levels, the amount S&P 500 companies spend on research and development has yet to recover to pre-2008 financial crisis levels.

Given this, regulators, governments and shareholders should be making much more effort to find out whether buybacks are damaging to business growth and capital formation, says the FT. There is a need to "quiz corporate boards on whether cash could be better utilised".

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One thing does seem clear the constant stream of buying from big companies has helped to prop up the post-financial crisis bull run by boosting stocks prices and a firm's earnings-per-share.

But the pace of repurchases peaked in July, and is now decelerating, JPMorgan strategists tell Bloomberg. "If this trend continues, the extra boost that US repatriation provided to US equity and bond markets via share buybacks and corporate bond redemptions is largely behind us." A key tailwind for US markets may now be turning into a headwind.

Marina Gerner is an award-winning journalist and columnist who has written for the Financial Times, the Times Literary Supplement, the Economist, The Guardian and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany.

Marina is also an adjunct professor at the NYU Stern School of Business at their London campus, and has a PhD from the London School of Economics.

Her first book, The Vagina Business, deals with the potential of “femtech” to transform women’s lives, and will be published by Icon Books in September 2024.

Marina is trilingual and lives in London.