When it comes to stock buybacks - an increasingly politically charged topic - 2018 has already been a historic year: as we first reported three months ago, as a result of Trump tax reform which made offshore cash repatriation far more economical, corporations would use much of this redomiciled cash to buyback $650 billion of their own stock in 2018, an all time high (for an extended analysis of the market and political implications of record cash flows, see ""Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks")
A few weeks later, JPM followed up with its own stock buyback analysis, calculating that no less than $840 billion in stock would be repurchased courtesy of the new tax law, a staggering number as shown in the chart below.
Fast forward to last week, when the WSJ expounded on the stock buyback tsunami, reporting that "U.S. companies are buying back their shares at a record pace, providing support for the stock market when many investors have rushed for the exits."
S&P 500 companies that have reported earnings for the first three months of 2018 bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. That is on pace for the biggest amount in any quarter, based on data going back to 1998. About 85% of S&P 500 components have reported so far.
Indeed, this largely debt-funded activity - or rather extremely cheap debt-funded activity...
... has been a panacea to corporations and their management teams, eager to boost not only their stock price but also their equity-linked compensation, in the process sending the overall S&P to new all time highs, as more and more shares outstanding are quietly taken out of circulation.
"The reason these companies are buying their stock is that they’re smart enough to know that it’s better for them than anything else,” said Charles Munger, vice chairman of Berkshire Hathaway Inc., at the company’s annual meeting last weekend.
It is hardly a surprise then that Berkshire Hathaway recently became the 3rd largest holder of Apple stock: having lost the ability to innovate, Tim Cook is now the single largest repurchaser of stock in the S&P500...
... having just bought back a
record amount of AAPL shares:
Incidentally, Buffett's brief infatuation with IBM was for the same reason: until recently, Big Blue had been the biggest, most reliable repurchaser of its own stock. That all ended in 2014 when as we reported at the time, the company's leverage became too big to sustain the surge in buybacks, sending both IBM stock price, and Buffett's interest in it, tumbling.
Going back to the direct impact of buybacks, contrary to the false public perception that...