The environment of financial repression provided companies with the perfect tailwind to pursue buybacks that boost both EPS and shareholder returns. However, it appears that this secular driver has peaked and is losing momentum.
US buybacks (ex financials) reached a peak in Q3 2022 but have been in decline since
Chart 1: US (ex financials) quarterly and rolling 4Q buybacks (USD, Bn)
US buybacks (ex Financials) peaked at trailing 4-quarter rate of $1tn in Q3 last year and have eased back since. The opportunity to repurchase shares on a large scale has been rational behaviour for companies in the post-GFC landscape of extremely cheap money and rising free cashflow. However, with interest rates rising and profits declining, there will now surely be big question marks over companies' willingness to sustain buybacks at these levels.
With technology buybacks declining where will the new leadership come from?
Chart 2: US technology companies have been the dominant force behind US buybacks
Chart 2 shows the US sector buybacks as a percentage of total (ex financials) buybacks, demonstrating the dominance of the technology sector. Over the past decade technology has seen its share of buybacks rise from 20% to a peak of over 50% in mid-2021. The share of the next four biggest sectors has largely remained flat and range bound. With technology buybacks now in decline, there will be big question marks over which sectors, if any, will pick up the baton.
A US buyback adjusted yield is almost 3x higher than the cash dividend yield
Chart 3: Comparing the US dividend yield with the buyback-adjusted yield
Chart 3 shows the impact on the effective yield returned to shareholders when buybacks are included. The buyback-adjusted yield rises to 4.3% (versus a 1.6% dividend yield). Compression in the adjusted yield will impact long term return projections.
Source: Wilshire and FactSet. Data as of March 13, 2023
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