Stock buyback announcements have surged this year.
But how many companies will actually follow through?
“Companies are announcing buyback plans at the fastest pace on record. So far in 2015, announced buybacks are up 50% compared to 2014,” wrote Barclays’ Jonathan Glionna in a note to clients this week.
Glionna added, however, that the increase in announced buybacks is not bringing about an increase in completed buybacks and also notes that much of the increase in buyback announcements comes from a few big players.
For example, Apple and General Electric have both announced $US50 billion buybacks this year, while the Home Depot said it would be repurchasing $US18 billion worth of shares.
Gilead Sciences, Qualcomm, Pepsi, American Express, and Merck also have all announced buybacks worth $US10 billion or more.
And just yesterday, Target joined the ranks, announcing that it would be doubling its share buyback to $US10 billion.
We do not expect the 50% increase in announced buybacks to lead to a similar increase in completed buybacks. But, that does not mean announced buybacks do not have implications for the market. Our data suggests that buyback announcements make equities go up. To determine this, we evaluated the relative performance of stocks following buyback announcements… About half of the excess return (90bp) is realised at the announcement date. The only way to capture this upside would be to anticipate the buyback announcement. But, even if the buyback is not predicted, upside remains.
Glionna adds that last year was the second-largest for completed buybacks on record. The $US553 billion worth of stock repurchased in 2014 was just $US36 billion short of the record set in 2007. But based on preliminary estimates for Q1 of 2015, Glionna says that completed buybacks have dropped 10% compared to the same period in 2014.
While Glionna says that announced buybacks have helped stocks outperform, he thinks stocks won’t do much the rest of this year due to the lack of completed buybacks. That is, without completed buybacks to help push up stocks this year, Glionna estimates that the S&P will end the year at an unimpressive 2,100 — only 41 points up from 2014 and actually down from where it is trading on Wednesday.
Glionna also included this graphic outlining his thought process on buybacks:
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