Tailwind from US share buybacks is weakening

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.

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".

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.

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The great rotation is firmly underway – what does it mean for you?
Stockmarkets

The great rotation is firmly underway – what does it mean for you?

As investors move away from “jam tomorrow” stocks and back into “old economy” stocks that should benefit from the post-pandemic recovery, the tech-hea…
5 Mar 2021
America’s “SPAC” boom is coming to Europe
Stockmarkets

America’s “SPAC” boom is coming to Europe

SPACs are shell firms that list on the stockmarket in order to raise cash, then merge with another company. Once confined to the US tech scene, Europe…
4 Mar 2021
Why the classic 60/40 investment portfolio may no longer work
Investment strategy

Why the classic 60/40 investment portfolio may no longer work

The dramatic events in the bond market have thrown into question the classic investment strategy of the last 40 years. An investment portfolio made up…
1 Mar 2021

Most Popular

A beginner’s guide to bitcoin: where to store your bitcoins
Bitcoin

A beginner’s guide to bitcoin: where to store your bitcoins

Once you've got hold of some bitcoins, you need somewhere secure to keep them. Dominic Frisby outlines some of the best options, from exchanges to col…
4 Mar 2021
A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
Bitcoin

A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works

In the second in his series on bitcoin, Dominic Frisby looks at the blockchain – bitcoin’s unique underlying architecture – and what makes it and the …
2 Mar 2021
The great rotation is firmly underway – what does it mean for you?
Stockmarkets

The great rotation is firmly underway – what does it mean for you?

As investors move away from “jam tomorrow” stocks and back into “old economy” stocks that should benefit from the post-pandemic recovery, the tech-hea…
5 Mar 2021