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Share buybacks could approach record levels in 2020 after 2019 fell short

Share buybacks by S&P 500 companies in 2020 are forecast to come close to 2018's record tally, after expectations of a record-breaking 2019 did not come to fruition.

Buybacks would reach $804 billion in 2020 under an S&P Dow Jones Indices estimate, just short of the tax-cut-fueled record $806.4 billion in 2018. The estimate would represent a 9% increase over the expected $736.4 billion figure for 2019, which is yet to be confirmed as earnings season continues.

"Buybacks, at this point, appear to have a solid base in the number of shares needed to cover [employee] options, with the discretionary purchases being the key," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "Current programs lean towards higher 2020 purchases, with investor sentiment also calling for more," he concluded.

Silverblatt pegged the consensus Wall Street estimate at $808 billion.

'Keep shareholders sweet'

S&P 500 companies with cash to return have traditionally favored the short-term nature of buybacks, which offer greater control than dividends and support EPS growth.

"It's basically a relatively easy way for companies to continue to keep shareholders sweet," said Peter Dixon, a senior economist at Commerzbank AG, adding that companies may not be investing the cash due to uncertainty or the rising hurdle rate of investments. "Companies clearly don't feel as though return on investments are fantastic."

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J.P. Morgan in January made a case for a decline in buybacks in 2020, owing to higher valuations and record high unexecuted repurchase programs.

The bank instead expects greater emphasis on capital reinvestment for growth, namely capex, dividends and M&A activity, citing improved business sentiment from global growth and trade deal prospects as drivers.

Upward trend to end 2019

Early 2019 estimates had predicted that cash-rich S&P 500 companies would carry out another record level of buybacks, totaling up to $1 trillion, but expectations were dampened after declines in the first and second quarters of the year.

Declines were reversed in the third quarter, which posted a 6.3% gain over the second quarter, to $175.9 billion, boosted by Apple Inc., which spent $17.6 billion on buybacks, followed by financials Bank of America Corp. ($7.6 billion), Wells Fargo & Co. ($7.5 billion) and JPMorgan Chase & Co. ($6.9 billion). The impact of buybacks remained broad, with 22.8% of companies using buybacks to reduce their share count by at least 4% and increase their EPS, according to S&P Dow Jones Indices.

While earnings reports still being filed, fourth-quarter 2019 share buybacks are expected to come in 7.6% higher than the previous quarter, at $189.2 billion.

"Anything over $170 billion was seen as supporting stocks and continuing share count reduction," Silverblatt wrote.

"What might change the picture is if there is some form of economic slowdown, where companies realize they can't generate as much cash, so may be willing to hold a buffer," Dixon said. "However, it really is a cyclical issue which doesn't appear to be an imminent problem for 2020. Companies can be caught out, but there is nothing on the horizon," he added.