Stock buybacks are set to reach an all-time high this year, with $1 trillion in share repurchases forecasted by year-end. The most recent data shows a 3% increase in corporate share repurchases quarter-over-quarter, a meaningful increase to the $270 billion in buybacks during the fourth quarter of 2021. On the surface, this data may appear disconnected from the broader macroeconomic environment as investors are concerned about high inflation, rising interest rates, and the ongoing war in Ukraine. However, with the S&P 500 down 12.7% year-to-date as of May 31st, 2022, valuations look more attractive today than they did in the Fall of 2021. Ample cash levels on corporate balance sheets also provide a nice backdrop for companies to repurchase shares, especially if management teams believe the market undervalues their stock. JPMorgan noted that non-financial companies in the S&P 500 have a collective $1.9T on their balance sheets, while amongst the almost 3000 companies with market capitalizations over $1 billion, 219 of them hold more than 25% of their market value in cash. Companies may use buyback programs to return value to shareholders rather than initiating or increasing cash dividends, as buybacks provide management with more flexibility. Companies can prefer buybacks over dividends for multiple reasons. Buybacks work well for one-off returns of capital to shareholders as dividends can be difficult for management to cut back in the future. Share buybacks also mathematically increase earnings per share. Additionally, unlike payments from debt securities, buybacks are treated as capital gains instead of income, which is preferred by investors when tax season rolls around.
As inflation causes profit margins to tighten, managers may find boosting earnings-per-share through buybacks timely and attractive. Some analysts view the uptick in corporate buybacks as a positive sign for the stock market, as it highlights the financial strength of companies, while others are not convinced. Critics of buybacks programs believe there are better ways to provide value to shareholders, such as paying down debt and reinvesting in core competencies to strengthen operations and the overall business itself. Regardless of analyst opinions, companies are set to buy back a record amount of shares this year, with the healthcare, finance, and technology industries leading the way.