Share Buybacks Decline for Second Straight Year in 2016

Buffett's Apple makes second biggest repurchase; dividends on the rise

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Mar 22, 2017
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According to S&P Dow Jones Indices, companies of the S&P 500 index in the fourth quarter pulled back on their share repurchases by 7.2% from the fourth quarter 2015, although they accelerated 20.6% sequentially.

Companies spent $135.3 billion buying back their shares during the fourth quarter, compared to $112.2 billion from the third quarter and $145.9 billion in the fourth quarter 2015. For the full year, they spent $536.4 billion on buybacks, a decline from $536.4 billion in 2015 and $553.3 billion in 2015 – the first time the index saw two consecutive years of declines since the financial crisis era or 2008 and 2009.

The slowdown comes as the S&P pushed to record highs and companies’ shares became increasingly expensive following the election of President Donald Trump in November. The index gained 8.68% for the year, with a 4.12% climb in the fourth quarter.

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"The ability of companies to increase buybacks remains high, as cash declined a tick from last quarter's record level, with money remaining relatively cheap and easily accessible," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

"However, the slowdown since Q1 2016 may indicate that companies do not currently want to increase planned buybacks. Q1 2017 prices are averaging higher, up 6% from Q4 2016 and up 19% from Q1 2016, meaning increased expenditures may be needed to cover the higher share prices to avoid EPS dilution."

Leading buybacks was the health care sector, which accounted for 21.4% of companies’ repurchases, a giant increase from 11.7% in the previous quarter. Allergan (AGN, Financial) prevailed among all companies for its $12.3 billion accelerated buyback program.

Financials also increased buybacks by 6.2% sequentially, while information technology decreased their percentage of total buybacks by to 21.2% from 23.2% and energy decreased its contribution to 0.7% from to 1.2%, sequentially.

Warren Buffett (Trades, Portfolio) holding Apple followed Allergan as the second highest spender, buying $10.8 billion of its shares in the fourth quarter, which ranks as the ninth-largest quarterly repurchase in history. The iPhone maker spent only $33.7 billion for the full year 2016, however, down from $37.1 billion in 2015.

The next highest repurchases below Apple and Allergan were Citigroup (C, Financial), Microsoft (MSFT, Financial) and General Electric (GE, Financial).

Shareholders fared better for the quarter overall due to a higher combination of returns in the form of buybacks and cash dividends, which increased 13.5% to $239.1 billion in the fourth quarter, compared to $210.6 billion for the previous quarter. But the amount for the year totaled $934.6 billion, a 2.2% decline from 2015.

Dividends alone grew 5.5% for the fourth quarter to $103.8 billion, marking the first time payouts exceeded $100 billion. For the year, dividends increased 3.9% to $397.2 billion.

"Base buyback expenditures, used to negate stock options, may need to increase to compensate for higher share prices, as markets have posted all-time highs. Discretionary buybacks, used to reduce share count and increase EPS, have declined but remain popular,” Silverblatt said.

"Looking ahead, repatriation legislation, either separate or as part of income taxes, could boost shareholder return, with buybacks being more popular than dividends."