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Share buybacks hit highest level since 2018
Stock buybacks are increasing, a sign that American companies are optimistic about the US economy.
Companies have announced share buybacks of more than $383 billion in the past 13 weeks, a 30% increase from the same period a year ago and the largest sum since June 2018, according to research from Deutsche Bank. Total includes Apple’s US$110 billion planthe largest buyback in history.
Deutsche Bank’s equity strategy team notes that the “boom” in buybacks extends beyond big names like Apple (AAPL) and Alphabet (GOOG, Google), which has just announced a US$70 billion buyback plan. Of the $262 billion in buybacks reported in the first quarter earnings season, $82 billion came from companies outside of the big tech giants.
This is a welcome sign for those looking for an extension of the stock market rally.
“Buybacks have been the biggest driver of stocks over time in the medium term,” Deutsche Bank chief equity strategist Binky Chadha told Yahoo Finance ahead of the start of Q1 earnings reports.
For Chadha, the importance of buybacks is simple: they tell investors how companies feel about the macro environment.
Buybacks typically increase when profits increase, Chadha said. This is because as income increases, which is currently happening at the fastest pace in almost two years, cash flow in companies increases. Companies can then use this cash flow to increase dividends paid to shareholders, increase capital expenditures to invest back into the company or repurchase shares and in turn return capital to shareholders.
This trend has not materialized in 2023. Profits have increased, but buybacks have not. Chadha reasoned that this probably had to do with the overwhelming majority project a recession that will hit the US economy.
“When the macro consensus is in favor of a severe slowdown or a recession, companies will not do buybacks,” Chadha said. “They will keep the money.”
But this macro consensus has changed. Economists and macrostrategists are feeling more optimistic about U.S. economic growth this year. Companies are confirming this confidence with buybacks.
“What did you see in [fourth quarter] The earnings report earlier this year is that buybacks have really started to pick up,” Chadha said. “So I would say that cloud of cyclical overhead is lifting. Companies are getting more comfortable with the outlook.”
JPMorgan Private Bank global investment strategist Elyse Ausenbaugh noted that the increase in buybacks provides a “good basis for investors,” as companies repurchasing their shares help support the market, even as individual stock investors are not investing money in stocks.
The story continues
And taking it a step further, Ausenbaugh sees buybacks as just part of the argument that in first-quarter earnings, companies are seeing higher cash flows and using them in ways that will eventually benefit shareholders. such as increased capital expenditure for large technology companies.
[Boosted capex is] we will continue to drive these trends that have been very supportive of the market, such as AI,” Ausenbaugh told Yahoo Finance.
In this June 16, 2020, file photo, the sun reflects off the Apple store on Fifth Avenue in New York City. (AP Photo/Mark Lennihan, File) (ASSOCIATED PRESS)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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