Earlier this year there was talk about banning the corporate buybacks. Ban the buybacks they said. Buybacks are a boon for the rich they said. Buybacks are evil! Buybacks are Ruthless!!!
Recent data showed buybacks slowed for the first time in almost two years this past quarter.
Oh no! There goes the bull market, they said. Buybacks have accounted for the majority of the buying during this bull market.
The stock market will crash without the corporations buying themselves!
Since 2010 corporate buybacks have averaged over $420 billion annually. Compare that to $10 billion each for investors, mutual funds, and foreign investors, according to Bloomberg.
I wrote about this over 4 years ago. The share buyback machine has played a large role in the continued record highs of the stock market. Many still believe that buybacks are nothing more than a means to mop up equity based executive compensation. However I disagree. And the numbers have my back.
Clearly.... stock supply has SHRUNK because of the corporate buyback machine. And in some cases stunningly so. Corporate buybacks have created less supply amid a growing passive investing world that treats their retirements like a Chicken in a Ron Popeil Rotisserie. Set it and forget it.
Share buy back programs are ruthless. They are like the Terminator. "I'll Buyback!"
Listen, and understand! That Share buyback program is out there! It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear! And it absolutely will not stop, ever, until every share is gone!
Ebola? Impeachment? Trade Wars? Tariffs? Cypress? Greece? Iran? Turkey? Syria? Coups? Tsunamis? Sequesters? Gov't Shutdowns?
The sharebuyback machine wakes up ever morning and doesn't look at the headlines. It looks in the mirror... and everyday day it likes what it sees.
Those bears out there thinking higher interest rates would rust the gears of the sharebuyback machine, were pounding their chests when the most recent quarter showed a decline in corporate sharebuybacks. Finally... they thought... an end to the madness!
And yet the FED is now on a course to start cutting interest rates again. Putting fresh oil on those squeaky buyback gears.
Those looking for the death of the buybacks are going to have to wait quite a while longer. Which means this bull market has quite a while longer to go. As long as interest rates remain low and corporations continue to view sharebuybacks as the most efficient means to increase shareholder value, don't expect this trend to stop anytime soon.
And while some argue buybacks are not the best use of capital, since 2009 companies that have bought back their own stock have outperformed. And at the end of the day, as a shareholder, performance/price is all that matters.
So lets get into it...
How much has supply shrunk?
Lets look at Home Depot.
and you can pick almost any Dow Component and get a similar result.
In 2007 Home Depot had just over 2 BIllion shares outstanding, in 2019 Home Depot has 1.14 BIllion shares outstanding or 44% less shares outstanding!
Home depot continues to buyback its own stock, with its share count dropping 3-4% every year on average.
It's stock is up over 500% since 2012....
Lets look at Apple.
When Apple began its stock buyback program it was small, with respect to its current massive shareholder enrichment program. It took a few years for that sharebuyback program to really gain momentum, as the first buyback announcement stalled the slow increase in outstanding shares from executive compensation.
However as the program increased from just $10 billion to over $100 billion, the stock has reacted positively.
While not on par percentage wise as the likes of Home Depot. $AAPL has seen its outstanding shares drop over 25% since it began its buyback program in 2012.
It's share price has more than tripled over that same time.
I could go on and paint a similar story for almost any widely followed corporation. Sharebuybacks clearly have shrunk outstanding shares, making earnings look better and creating less supply in a market that is passively buying... right along with the corporations regardless of what negative headline is being used to scare average folk out of investing in the stock market.
The S&P500, Nasdaq, and Dow all closed at record highs yesterday. There was no confetti. No celebrations. Why? Sharebuyback machines don't feel. They can't be bargained with. They can't be reasoned with. They don't feel pity, or remorse, happiness, sadness or fear! And they will absolutely not stop, ever, until every share is gone......
Sources and more on buybacks: