Companies are on pace to shatter records for share buybacks — and their behavior is dispelling a few key myths about the stock market

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Stock buybacks are on track to set an annual record for a second-straight year, according to data compiled by Bank of America Merrill Lynch.
The unprecedented fervor with which companies are still repurchasing their shares sends a number of key messages about the market — contradicting what some strategists have forecast.

It's only February, but one stock-market trend that shattered records in 2018 is already on track to set a new milestone.

Publicly traded companies are poised to spend a record amount of cash on share buybacks this year, according to equity strategists at Bank of America Merrill Lynch.

Last year, corporations announced more than $1.1 trillion in share repurchases. The breakneck pace of stock buying was largely thanks to the cash windfall that companies received from tax reform, and their newfound incentive to repatriate profits that had been held overseas.

No sectors contributed more to this unprecedented feat than technology and financials.

Apple, which already had a strong track record of returning capital to shareholders, announced its largest-ever buyback program worth $100 billion last year. And Warren Buffett's Berkshire Hathaway, which rarely buys its own shares, made a stunning change to its buyback policy and agreed to repurchase shares when prices fell below their "intrinsic value."

Companies in sectors beyond tech and financials are now joining in the bonanza and are on track to set their own records. According to BAML data, buyback authorizations in the staples and materials sectors have easily topped the levels they reached in 2018 (on an annualized basis) and could be at all-time highs by year-end.

As overall buybacks head for another record, they are in a position to challenge various assumptions that some investors have made about the future of the stock market.

The first is that the bull market in stocks has little room left to run. After all, it's unlikely that companies would be rushing to buy back their shares — instead of using the cash for other pressing needs — if they do not see any upside to stock prices. Before last year's record was set, buybacks hit cycle highs in 2015 — and that didn't mark the top tick for this bull market.

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However, buybacks can also be seen as a double-edged sword. The frenzy in repurchases, like euphoria among investors, can serve as a signal that the cycle is nearing its end. That was exactly the case in 2007, with the caveat that the financial crisis that followed was unlike any ever witnessed before.

At the end of the day, buybacks do engineer stock-market gains by reducing the count of outstanding shares, and in turn, increasing the earnings that accrue to each existing share. This simple mathematical tweak, combined with the bullishness that companies display by investing in their own shares, is what lifts stock prices.

It's why fears of an earnings recession in some corners may be overblown, even with the emerging evidence that the economy is slowing down.

"We expect S&P 500 earnings per share to get at least a 2% boost in 2019 from buybacks, despite being somewhat politically unpopular," said John Lynch, the chief investment strategist at LPL Financial, which oversees $628 billion in assets.

That leads us to the next cold truth about buybacks: political pressure is not deterring companies from authorizing them.

The failure of the tax cut to meaningfully ramp up capital expenditure has led to criticism of how companies are using their cash. Sen. Bernie Sanders, for example, wrote in a New York Times op-ed that profitable companies were using buybacks to enrich the wealthy few while laying off workers. This backlash even caused a Twitter spat between Sanders and former Goldman Sachs CEO Lloyd Blankfein.

Even Sen. Marco Rubio, a Republican, has proposed taxing stock buybacks and simultaneously making it more attractive for companies to invest their cash elsewhere in the economy.

It's still anyone's guess whether any of these proposals — which are indicative of longstanding disputes — will come to fruition. For now, companies are free to ignore the naysayers and continue the buyback frenzy. Read »