Companies return to buying own stock
Buybacks to boom due to lowered corporate tax bills
NEW YORK — The biggest buyers of stocks are coming back.
More than any other group, companies themselves are the largest purchasers of their own shares. But they were notably absent from the market the last few weeks, just as stock prices were tumbling on worries about global trade and rising interest rates.
Businesses held back the last few weeks because they were in a “blackout” period for buybacks, a regular occurrence leading up to the release of their quarterly results. Now that most companies in the S&P 500 index have given their third-quarter reports, blackouts are lifting, and analysts across Wall Street say the return of those buyers should help support the market. The S&P 500 climbed 2.7 percent over Tuesday and Wednesday and another percent Thursday, after losing nearly 10 percent in the four prior weeks.
“There’s been a quiet period on buybacks, and the indication is that next month we’re going to have four times as many buybacks as we had” in October, said Marina Severinovsky, investment strategist at Schroders.
The dollar amounts are huge, a result of the record profits thanks in part to lower tax bills. Corporations in the S&P 500 index may buy back up to $1 trillion of their own stock this year, some analysts estimate. Last year, S&P 500 companies repurchased $519.4 billion of their stock, according to S&P Dow Jones Indices. The recent
drop in stock prices leaves those shares more attractively valued, giving companies even more incentive to repurchase stock.
Stock repurchases help investors and companies in a couple ways: They provide support for stock prices by adding more buyers to the market, and they can also goose a company’s earnings per share. When a company makes $100 in profit, each investor checks how much of that their shares can lay claim to. If there are 100 shares, the company earned $1 for each. But if the company takes 50 shares off the market by buying them back, suddenly $100 in profit becomes $2 for each share.
Buybacks are particularly important when companies are issuing new shares to pay employees or to raise cash, which can dilute the ownership stakes of longtime investors. By repurchasing their shares, companies can offset the effect.
So far this earnings season, nearly 20 percent of reporting S&P 500 companies have said that reduced share counts gave them a boost of at least 4 percent in earnings per share, according to S&P Dow Jones Indices.
It pays to keep track of such numbers because the stock market’s big winners tend to be the companies that most reduce the number of shares they have trading in the market.