Share buybacks by S&P 500 companies are on track for a new annual record in 2021 despite the high price of stocks limiting their benefit.
Record levels of bond issuance and a sharp economic recovery have left companies flush with cash, encouraging corporate board rooms to return capital to shareholders. The prospect of new taxes being introduced in 2022 has also encouraged the trend.
Share buybacks in the third quarter of 2021 broke the quarterly record, with the $232 billion total beating the previous benchmark of $222.98 billion in the fourth quarter of 2018, according to data from S&P Dow Jones Indices. The record total may have further to go as only 97% of companies have reported so far for the quarter.
In the first nine months of the year, buybacks totaled $608.97 billion, far higher than the full-year total of $519.76 billion in the COVID-19 affected 2020. The record total of $806.41 billion in 2018 is well within sight, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
"I've penciled in a new annual record," Silverblatt said in an interview, noting, "I would put in for a record next year  as well."
Corporate commitments to buying back shares were one of the first expenses to be cut when COVID-19 hammered financial markets in March 2020. The subsequent buildup in cash levels has removed the risk of defaults and encouraged companies to spend. This has resulted in record levels of expenditures on mergers and acquisitions and dividends, as well as buybacks.
Buying back shares has the benefit of reducing the number available in the market, increasing the earnings per share of the stock and giving the stock a more attractive valuation. But the elevated stock market means that despite the record amount spent, the share count reduction of the buybacks is lower than it would normally be.
Just 6.8% of companies increased their EPS by at least 4% as a result of reducing the share count, as opposed to 22.8% in the third quarter of 2019, when the expenditure on buying back shares was much lower at $175.89 billion, according to Silverblatt.
Instead, there may be other drivers. "There appear to have been more options exercised that don't have to be," Silverblatt said, noting, "For some reason, some people may be nervous about taxes next year."
Share buybacks are controversial. The Democratic party has been critical of a practice they see as emblematic of businesses serving shareholders rather than workers and the wider economy. Democrats in the Senate would like to add a 2% excise tax on stock buybacks, while President Joe Biden has aimed to increase the corporate tax rate from 21% to 25%. A higher tax rate will reduce the cash that companies have to buy back shares in 2022 if Congress approves the tax.
Even with the possibility of new taxes, U.S. companies are expected to remain in a healthy position to buy back shares so long as new variants of COVID-19 do not force a repeat of previous economic lockdowns.
The hugely cash-generative tech sector leads the way in share buybacks. Information technology companies accounted for $62.76 billion of the $198.84 billion of buybacks in the second quarter, led by Apple Inc. — the largest single exponent. Apple bought back $467.23 billion of shares in the 10-year period up to the second quarter.
Tech stocks surged in 2020 and 2021 on the back of strong profitability. "There is every reason to believe this growth can continue," Peter Spijkman, senior investment specialist, at Aegon Asset Management, said in an email. "There has been a trend towards greater use and adoption of technology, which has been accelerated by the pandemic. … Higher valuations for equities are supported by expected earnings growth."
The strength of the economy is expected to persist even with inflationary pressures as households still have large amounts of cash saved during the pandemic period to unleash on goods and services.
"We believe that consumer demand remains very strong," Ido Cohen, fund manager at Invesco said in an email. "In aggregate, consumer spending power appears to be elevated, given the high excess savings and low debt levels. We're quite bullish on the consumer's ability to spend through 2022 even as GDP growth slows."
S&P Dow Jones Indices and S&P Global Market Intelligence are owned by S&P Global Inc.