If EPS grows slower than net income, this must mean a net increase in shares outstanding (share issuance exceeded buybacks). As a result, if EPS grows faster than net income, this must mean a net reduction in the number of shares outstanding (buybacks exceeded share issuance). Which sectors are most vulnerable in a world of no buybacks?ĮPS is equal to net income divided by the number of shares outstanding. A more nuanced analysis shows that the net effect of removing buybacks will be most felt in a handful of sectors and companies. Yet the top 20 companies accounted for nearly a third of this total and Apple alone accounted for 8%. For example, the 500 largest US companies spent $3.2 trillion on buybacks over the last five years, according to data from S&P Dow Jones. The main issue with this framing is that it disguises which companies have been doing most of the buying. If these trends continue, the market drawdown could be exacerbated and delay the recovery in equity markets. Buybacks in the final quarter of 2019 were already down 20% from a year earlier and M&A activity has fallen by 51% in the first quarter of 2020, the worst annual fall since 2008. Data to 2019.Ĭorporate purchases have been driven by a combination of buybacks and mergers and acquisitions (M&A), with a roughly 50/50 split of each. However, in the first quarter of 2020, they tumbled by 31% compared with a loss of 21% for the S&P 500. The top 100 companies with the highest buyback ratios (buyback volume relative to market cap) have outperformed the broader market since 2008. Warren Buffet once said “only when the tide goes out do you discover who’s been swimming naked.” As the buyback boom comes to an end, companies that have “juiced” their EPS growth and thus their share prices are likely to be disproportionately affected. Markets have priced in a deteriorating buyback outlook
#History stock market drawdown and recovery analysis driver
The pace at which the global economy recovers after the coronavirus pandemic will be the most important driver of profit growth, not share buybacks. The impact of this move on the overall market is likely to be more limited than widely believed.
However, our research suggests that fears that a collapse in the number of share buybacks could accelerate the market downturn are overblown. This could cut a layer of support for markets at a time when they need it the most. The longer the virus lasts and the greater the need for cash, the more likely it is that other companies will follow suit. Fast-food chain McDonalds, electronics retailer Best Buy and telecom provider AT&T have all suspended buybacks to shield themselves from further economic damage as a result of the Covid-19 outbreak. But these buybacks can be cut when cash preservation and credit worthiness are a priority.
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This reduces the number of shares outstanding and as a consequence boosts earnings per share (EPS) and the company’s stock price. A share buyback is where a company buys back its own shares from the marketplace. So the recent headlines that dozens of US companies are now ending this practice has intensified investor unease about the depth of the market sell-off. Share buybacks have been credited with fuelling the longest equity bull market in US history.
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