After committing enormous sums to finance aggressive plans for share repurchases in 2017, most S&P 500 corporations intend to follow suit for the remainder of 2018 and, depending on market and economic conditions, well into 2019.
Goldman Sachs analyst,= Cole Hunter estimates that S&P 500 companies will bump up cash spending by an additional 13% in 2019 for a total of $3 trillion. Hunter expects that the amounts will be evenly apportioned. Around 51% will be allocated for research and development, capital expenditures as well as mergers and acquisition activity. Approximately 49% will be returned to shareholders by way of share repurchases and dividends. The year to date stock buyback authorizations have almost doubled from the level last year.
According to DataTrek Research, for the 12-month period ending in June, companies in the S&P 500 spent $646 billion buying back their own shares.
These sums authorized and set aside for stock buybacks for 2018-19 follow on the heels of massive distributions to shareholders throughout 2017. The impetus for the bountiful cash infusions over the last two years was the elimination of the 35% tax on foreign earnings, effective in late 2016. Prior to the tax law changes, large corporations had amassed a massive $2.5 trillion in accumulated overseas profits.
Once the foreign earnings tax was eliminated, most of that accumulated cash was repatriated, leaving some of the largest S&P 500 corporations in a position to shower their shareholders with astronomical sums of cash.
Once the dam broke, hundreds of billions of dollars started flowing back to the domestic coffers of U.S. corporations. According to congressional estimates, over the next decade, corporations can expect to save $223.6 billion in the form of reduced taxes on foreign profits.
If the past year of robust and frenetic cash distributions is any indication, 2018 will also prove to be a banner year for shareholders. Additionally, corporations have no plans for cutting back on share buybacks at the end of this year. Hunter anticipates that share repurchases could increase by 22%, for a total of $940 billion after an accelerated rate of 44% in 2018.
The 2019 projected volume of stock repurchases could exceed the prior record level set in 2007. It is interesting to note that there is a striking difference in the balance sheets of the S&P 500 companies in 2018 versus the financial condition of the companies comprising the index in 2007.
In 2007, S&P 500 corporations paid out 72% of their total free cash flow to finance the share repurchases. For the past 12 months, the payout rate for companies in the same index was 35% — almost half.
Enterprising investors should consider taking a position in some of these repurchase-heavy corporations, such as Apple Inc. AAPL. During periods of economic growth, those companies that return the most free cash to stockholders in general tend to outperform those investing for future growth by way of capital expenditures and research and development, according to the Goldman Sachs report. The former has seen an average 17% appreciation in their stock price; the latter group of companies, only 15%
The risk, of course, is that if the economy slows down and the unbroken consecutive string of record quarterly corporate profits that have marked 2018 starts to slow, share repurchases will likely wane considerably.
Disclosure: I have no positions in any of the securities referenced in this article.
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