Buybacks are making a comeback
In the years before the COVID-19 pandemic, one of the biggest sources of buying power in the stock market were the companies themselves.
At the post-crisis buyback peak of March 2018, members of the S&P 500 had spent a collective $823.2 billion repurchasing shares of their own company over the prior 12 months, a pace of more than $200 billion per quarter. During the second quarter of last year, in contrast, S&P 500 members spent a mere $88.7 billion repurchasing their shares.
But as the economy has improved, the stock market has rallied, and management teams can reward shareholders rather than hunker down to survive a recession, corporate buyers have returned as a force in the stock market.
Data from Bank of America Global Research published Tuesday showed that last week corporations spent the most repurchasing their own shares in more than five months.
“Buybacks by corporate clients accelerated from the prior week to the highest level since mid-March, driven by Financials,” the firm said in a note to clients. “Financials has now overtaken Tech as the sector with the largest dollar amount buybacks so far this year.”
Weekly buying from financials was the most last week since at least 2010, Bank of America’s data shows. And so far this year, companies in this sector have spent the second-most buying back their own stock with only 2019’s level of repurchases exceeding today’s pace.
And history suggests this could be good news for the sector in the months ahead.
“Based on our flows data from 2010 to today, we have found that the S&P 500 sector buying back the largest dollar amount in a given week have tended to outperform over the next several months,” Bank of America writes.
Compared to pre-pandemic trends, however, share repurchases are not what they once were, with Bank of America noting that repurchases year-to-date for the index as a whole are 14% below 2019 trends.
And while we see companies continuing to announce repurchase plans — see Dick’s Sporting Goods (DKS) and Analog Devices (ADI) just in the last 24 hours — there’s still a ways to go before actual repurchase activity gets back to where it once was. Another potential source of buying power for a market that keeps making record highs.