Companies have pared buybacks in bull market
Worried that American CEOS will blow their big tax windfall on share buybacks? A theory circulating on Wall Street says don’t be: Soaring valuations and a buoyant economy are making the tactic passé.
If only it were that simple.
“We’re in front of a major tax reform that will increase the amount of cash that corporations have,” said Tim Ghriskey, chief investment officer at Solaris Asset Management. “I know that Republicans believe that the extra money is going to be used to stimulate growth. I don’t think so.”
The theory that Corporate America is losing its taste for repurchases has its roots in a striking phenomenon. S&P 500 companies announced the intention to purchase $568 billion
of their own shares through the first 11 months of 2017. While hardly a pittance, it’s down 10 percent from a year ago and on pace to be the first decrease since 2008 in data compiled by Birinyi Associates.
That’scausedearstoperkup— paring buybacks in the middle of a bull market is virtually unprecedented. In the two prior economic cycles, it took full-blown recessions to convince companies to rein in repurchases.
Other market trends have instilled hope that even shareholders are getting sick of the tactic and would prefer to see the money plowed back into businesses. For one thing, shares of companies doing the most capital spending are beating those with an emphasis on buybacks and dividends by almost 2-to-1 in the S&P 500 Index this year, the biggest gap ever.
Then there’s the S&P 500’s price-earnings ratio, currently above 22.3. Could shares have become so expensive that even companies are balking at their prices? Maybe soaring valuations will deter repurchases and spur firms to spend their money elsewhere.
Says Jim Paulsen at Leuthold Group, the chief investment strategist at Leuthold Weeden Capital Management:“itisn’tsomuchthey pulled away from share buybacks. It’s that they now have more produc
STOCKS Amount Prince Alwaleed bin Talal saw his fortune drop. Talal, the richest person in Saudi Arabia, still has a net worth of $17.8 billion. He was one of the Saudi royal, government and business leaders arrested last month as part of a corruption crackdown by Crown Prince Mohammed bin Salman.
Jeff Bezos, founder of Amazon.com, clocked in as the world’s richest person, gaining $34.2 billion in wealth. Microsoft co-founder Bill Gates came in at No. 2. Bezos is worth about $99.6 billion, according to Bloomberg. Gates is valued at $91.3 billion.
China’s 1 percent did particularly well. There are 38 Chinese billionaires on the Bloomberg index, and they gained a combined $177 billion this year. That 65 percent jump was the largest for any of the 49 countries
WEALTH
represented. Hui Ka Yan, founder of property developer China Evergrande Group, saw his personal bank accounts swell by $25.9 billion, a 350 percent jump from last year.
Ma Huateng, co-founder of Chinese technology investment firm Tencent Holdings, saw his fortune double to $41 billion, making him the second-richest person in Asia. The number of billionaires in Asia has surpassed the number in the United States for the first time, according to a recent UBS Group and Pricewaterhousecoopers report.
Russia’s 27 richest residents did well, too. Their wealth grew $29 billion to $275 billion, despite the international economic sanctions imposed after President Vladimir Putin annexed Crimea in 2014.
Bloomberg’s findings are yet another indication that massive accumulation of wealth at the top of the economic ladder is leading to spiraling inequality.
The 2017 “World Inequality Report,” compiled by economists such as Thomas Piketty and Emmanuel Saez, found that the world’s richest 1 percent reaped 27 percent of the world’s income between 1980 and 2016. The bottom 50 percent got just 12 percent of the pie.
In China, the top 1 percent has accumulated 15 percent of all income growth since 1980. (About 13 percent flowed to the bottom 50 percent.) The bottom half of Americans have captured just 3 percent of growth since 1980.
In Russia, the economic assets of the bottom half have shrunk since 1980. Even Europe saw its top 1 percent accumulate 18 percent of growth, while the bottom half gained 14 percent.
Economists say economic inequality isn’t inevitable. Aggressive income tax and a strong social safety net matter, as do equal access to education. In fast-growing China and some developing nations, massive investments in infrastructure and a deepening base of manufacturing jobs have helped.
Unfortunately, few countries have aggressively pursued such policies.
Even billionaires have problems Of course, it’s not just the poor who are suffering. As Bloomberg put it, it’s hard out there for a billionaire:
With wealth surging to new highs, billionaires may quickly learn that a billion dollars doesn’t buy what it used to. The price of housing has topped $300 million. The cost of divorce has hit $1 billion, and a rediscovered painting by Leonardo da Vinci sold for $450.3 million at a Christie’s auction in November, making it the most expensive work sold to date.
“Would you believe it?” Eli Broad, who has a $7.4 billion fortune and his own museum in Los Angeles, said after the sale. “It’s wild.”