Share buybacks – the stockmarket’s safety net – are dwindling

published 30 August 2019

"The stockmarket's most important safety net is in danger," says Daniel Strauss on Business Insider. During volatile periods of this ten-year bull market US firms have stepped in to buy back shares, propping up equity prices. Yet in the second quarter they have bought back stock at the slowest pace in 18 months.

Buybacks reduce the number of a company's shares on the stock exchange. That improves earnings per share and boosts the share price. Many regard buybacks as a more tax-efficient means to return capital to shareholders than a dividend. Corporate tax reform in 2017 sparked a buyback "bonanza", but the sugar rush could be coming to an end, says Jessica Menton in The Wall Street Journal. Firms in the S&P 500 bought back $166bn of their own stock during the second quarter, marking the second successive quarter of contraction. With the trade dispute creating uncertainty and US corporate earnings weakening, managers seem to be tightening their belts.

Many would cheer the demise of buybacks. As Ben Holland and Liz McCormick report in Bloomberg Businessweek, corporate tax cuts and low interest rates are meant to encourage firms to invest more in the real economy. Yet bosses prefer to use those funds to buy back their own shares and have even taken on debt to do so. A "key part of the economic machinery has broken down".