has just begun, and US companies are planning a $155 billion share buyback. In
total, forecasts for 2024 put this figure at $885 billion, 10% more than in
2023 but still 4% below the 2022 record.
For
investors, this intel should be a big deal. Since 2011, share buybacks have
been a major factor, accounting for 40% of total US stock market returns,
especially in the S&P 500 index.
Indeed,
other factors such as dividend growth, EPS, and P/E multiples also matter, but
Pavilion Global Markets‘ data suggests they carry less weight.
In
theory, buybacks make sense when companies have more liquidity than they pay
out in dividends or have profitable investments on the horizon and their shares
are undervalued.
At the
moment, large companies tend to focus more on returning capital than growing
it.
Take big
oil as an example.
Despite
earning a whopping $357 billion in the seven years following the Paris
Agreement, they chose to invest billions in share buybacks and dividends
instead of fully engaging in the transition to renewables.
Specifically,
the five major oil giants spent more than their profits on shareholders: $428
billion in 2016-2022, of which $316.7 billion went on dividends and the rest on
share buybacks.
The jury
is still out on whether this move makes sense for the greater good.
Big Tech
isn’t exactly in a better spot. The combined cash stash of companies like
Apple, Microsoft, Alphabet, Alibaba, Amazon, and Meta tops $500 billion. The
burning question: where’s all that moolah headed?
If it
goes into share buybacks, it’s a win for shareholders, but only in the short
run. Investing in promising projects or breaking into new business frontiers
would better serve long-term gains.
The fact
that companies are cutting back on investment
raises alarm bells about their future growth potential, including expansion and
competitiveness. It is, therefore, essential to be cautious about these stocks.
And
let’s not forget that while buybacks can increase EPS by reducing the number of
shares, this does not necessarily mean that the company’s fundamentals are
improving.
Relying
too much on buybacks can look like a financial maneuver rather than actual
value creation.
The
sweet spot? A balanced approach where a company distributes its free cash flow
not only in buybacks but also in growth investments, cutting debt, paying
dividends and maintaining a healthy cash cushion.
As for
how to detect a possible change in market sentiment towards a specific stock or
the index itself, it is crucial to follow the support and resistance indicators.
This article was written by FL Contributors at www.forexlive.com.