According to Dow Jones Indices, spending on shares repurchases by members of the S&P 500 index dropped 21% in the second quarter compared to the first quarter, and 3.1% compared to the same period a year ago as companies pulled back on their budget expenditures.
S&P 500 companies spent $127.5 billion buying back their own shares in the second quarter, versus $161.4 billion in the record first quarter 2016 and $131.6 billion in the second quarter 2015. Companies tend to accelerate share repurchasing when their stock appears undervalued to increase their cost of capital or their earnings per share to look more attractive for shareholders.
Lowered expenditures
Prices that are hovering 2.2% higher in the third quarter than the second quarter mean companies will need to increase their expenditures or risk diluting their EPS, S&P Dow Jones Indices reported.
"The ability of companies to increase buybacks remains high, as cash is at a record level and money remains cheap and easy,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “However, the cessation of momentum after Q1 2016 may indicate that companies have not increased planned buybacks and rearranged expenditures to support their shares through the end of the fiscal period.”
Repurchases also dried up among most companies of the S&P 500, with the top 20 spending 46.6% of total second quarter expenditures and the number making more share-count reductions than issuances declined.
Sectors and companies
Repurchasing was concentrated in the information technology sector, where buybacks actually increased 23.6% from the previous quarter. Health care saw the biggest decline, with a 51.5% or $15.0 billion decrease in spending, reverting closer to its historical levels. The sector’s activity was a dramatic turnaround from the previous quarter, with it increased buybacks 86.1%.
The company that spent the most on repurchases was Apple. At $10.2 billion, it ranked as the ninth-biggest quarterly expenditure in S&P 500 history. General Electric (GE, Financial), AbbVie (ABBV, Financial), Microsoft (MSFT, Financial) and McDonald’s (MCD, Financial) followed Apple as the top five.
Corporate cash
The slowdown in buybacks has had little to do with any reduction in companies’ cash balances. Cash reserves of S&P 500 companies excluding financials, transportation and utilities rose 2% in the second quarter to a record $1.37 trillion, as companies globally continue to have relatively easy access to low-cost financing.
“The rate of dividend increases continues to slow across sector lines, as income investors remain limited in their alternatives,” Silverblatt said. “Base buyback expenditures, those used to negate stock options, may need to increase in Q3 2016 to compensate for higher share prices. Discretionary buybacks, used to reduce share count and increase EPS, remain the main unknown."
