After a year of hoarding cash, American corporations are ready to reward investors again.
Companies across industries have been buying back stock and raising dividends at a brisk pace this year. That is a sharp reversal from 2020, when they suspended or cut such programs, warning of the urgent need to preserve liquidity in the early stages of the Covid-19 pandemic.
Already this year, U.S. companies have authorized $504 billion of share repurchases, according to Goldman Sachs Group data through May 7, the most during that period in at least 22 years. The pace of announcements trounces even the 2018 bonanza that followed the sweeping tax overhaul of late 2017.
U.S. companies also ramped up dividend spending in the first quarter, data from S&P Dow Jones Indices show, increasing their payments by an aggregate $20.3 billion on an annualized basis. That marks the largest quarterly increase since 2012.
“The Covid clouds are clearing, and optimism is starting to come back in,” said
head of U.S. equity strategy at RBC Capital Markets. “It’s a natural time for companies to be thinking about using [those strategies] again.”
The increased desire among companies to spend comes as the U.S. economy is edging toward normalcy, and as executives are deciding how to deploy the cash hoard they amassed last year. Cash holdings among S&P 500 companies topped $1.89 trillion at the end of last year, according to S&P Dow Jones Indices, an all-time high and a nearly 25% increase from the end of 2019. Many issued record-breaking amounts of debt to help bolster their balance sheets, too.
In recent weeks, executives at companies ranging from
Advance Auto Parts Inc.
have unveiled plans for share repurchases or dividends—with many citing excess cash on their balance sheets, as well as confidence ahead. Apple said in April it authorized a $90 billion expansion of its buyback program, while Advance Auto Parts announced a 300% increase in its dividend.
Several banks announced similar plans after the Federal Reserve said it was lifting such restrictions on the industry. “We’re buying back stock because our cup runneth over,”
JPMorgan Chase & Co.’s chief executive, said on an earnings call in April. The bank late last year unveiled a $30 billion share-repurchase plan.
This week, investors will be watching for updates on corporate spending from companies including
and networking company
Cisco Systems Inc.
that are set to report results. They will also be parsing the minutes from the Fed’s most recent meeting for any clues about officials’ thoughts on inflation and future changes in monetary policy—two topics that have kept traders increasingly on edge.
Those anxieties were evident last week, when investors dumped shares of companies across sectors, sending the S&P 500 down 4% through Wednesday. That marked the benchmark index’s worst three-day performance in nearly seven months and offered a glimpse of the unease bubbling beneath the surface of what has been a hot stock market. Stocks managed to claw back some of the declines by the end of the week, putting the S&P 500 within striking distance of yet another record. The index has set 26 all-time highs this year and has surged 11%.
Still, many investors remain concerned about recent data that have shown prices for goods ticking up, prompting concern that inflation could cut into profit margins or accelerate the Fed’s timeline for tightening monetary policy. Money managers are also grappling with how to make sense of signs of euphoric sentiment.
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History shows that buybacks often help support the markets by providing a key source of equity demand—offering the possibility that activity could help drive the market higher even as uncertainty rears its head.
Companies’ eagerness to buy their own shares has been credited with helping drive the 11-year bull market that ended last year. Between 2010 and the end of 2019, S&P 500 companies poured nearly $5.3 trillion into the stock market through share repurchases, S&P Dow Jones Indices data show. Analysts say that helped support the market even as investors pulled money from U.S. stock-focused mutual and exchange-traded funds.
Whether that can happen again remains up for debate on Wall Street, especially in the short term if the market enters a protracted downturn. Meanwhile, some say a recent uptick in companies’ selling stock could offset part of the buyback activity.
Additionally, some analysts and investors say companies should redirect their spending to capital expenditures or other expenses instead. Investors tend to look favorably on companies putting cash toward items such as equipment and factories, betting that such spending can return more value to shareholders in the long term.
Early signs from earnings season, however, indicate that capital expenditures aren’t at the top of executives’ minds at the moment. According to an RBC Capital Markets’ analysis of first-quarter earnings transcripts for nearly 300 companies, analysts found that buybacks and dividends were each emphasized roughly three times more than capital investments.
Corporate executives often tout the importance of stock buybacks and dividend increases as a way to return excess cash to shareholders. But buybacks in particular are often a two-way street for companies. By reducing the number of shares outstanding, companies can—even without profit growth—boost their per-share earnings. That, in turn, can often drive their share price higher.
Even so, many say that buybacks are a bullish sign. Companies that have spent on shareholders have been largely rewarded. The S&P 500 Buyback Index is up 21% year to date, outpacing the S&P 500 by roughly 10 percentage points.
“The fact that more companies are starting to get back in there is a vote of confidence—they are putting their feet back in the water,” said
senior index analyst at S&P Dow Jones Indices.
Write to Caitlin McCabe at email@example.com
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