Despite the massive flow of funds repatriated over the past two years as a result of tax law changes, the large stockpiles of cash of many companies remain overseas. By the end of 2018, repurchase announcements reached the $1 trillion mark, setting a first-time record and representing almost double the amount in 2017. Since the 2008 financial crisis, large-cap companies have returned almost $5 trillion to stockholders through share repurchases. As a result of the massive buyback activity, the number of outstanding shares has declined to a 20-year low.
The favorable corporate tax changes induces American corporations to repatriate approximately $570 billion in cash from accumulated foreign profits during the first three quarters of 2018. However, a mind-numbing $1 trillion still remains overseas. Some analysts anticipate the pace of repatriating will continue, especially in light of the fact that recent market turbulence has left many companies' share prices depressed, presenting an auspicious moment for purchasing their own stock at depressed prices.
Even though the buyback authorizations typically occur over several years, the actual dollar amount expended on share repurchases has reached record levels. According to S&P Dow Jones Indices, third-quarter buybacks increased approximately 60% to a record level of $203.8 billion —a third consecutive quarterly record. Over the first nine months, share repurchases increased 53% to $583.4 billion, missing the all-time record set in 2007 by 1%.
It is interesting to note that despite the unprecedented total dollar amount of share repurchases that occurred in 2018, fewer companies account for the total dollar amount. Nineteen companies accounted for almost $460 billion of the total. Some of the companies include Apple, (AAPL, Financial), Qualcomm, (QCOM, Financial), Wells Fargo (WFC, Financial), Cisco, (CSCO, Financial), Bank of America (BOA, Financial) and Boeing (BA, Financial).
For investors, it is significant to note the causal nexus between the historically unprecedented dollar amount of corporate share repurchases and the 10-year unbroken bull market rally. Share repurchases and the market rise have been coeval events. In addition, the buyback activity has been one of the biggest supporters or floors for the market, especially during periods of volatility and corrections. This is noteworthy in that individual investors haven’t really participated in the same manner as they have in previous bull market runs.
Over the past four years, selloffs have induced many enterprising investors to buy on the dip, with the knowledge that the market would always rebound.
Stock repurchases are most helpful at stabilizing prices during a recession or periods of market turbulence. According to JPMorgan strategist Dubravko Lakos-Buja, stocks with higher repurchases tend to outperform their peers within their sector during selloffs or wild swings in the market. Since 2000, stocks with higher buybacks performed better than their peers by 1.5% during market corrections and by 2% during recessions.
Despite the tax law changes, many large tech companies have not spent their stockpiles of cash on share repurchases, but rather have invested that money in short-term bonds. At the end of the third quarter of 2018, Alphabet’s (GOOG)(GOOGL) portfolio was $119 billion —79% of which was invested in Treasuries or corporate bonds. Amazon (AMZN), by comparison, had a modest $30 billion, with 37% held in various fixed-income vehicles; Microsoft (MSFT, Financial) had $136 billion stashed in cash or cash equivalents, with 81% of that amount invested in Treasuries.
The decision to hold the repatriated cash in short-term bonds could have ramifications for the bond market. Liquidations of positions of that magnitude could adversely impact the bond markets, causing broad weakness in the overall market.
Even though the repurchase announcements may bring a smile to the lips of shareholders, corporate boards of directors are notoriously poor at timing the buybacks, frequently buying back shares during an unanticipated rally or at what turns out to be market highs.
Disclosure: I have no positions in any of the securities referenced in this article.
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