One of the big drivers of earnings per share growth has been stock buybacks.
The maths is relatively straight forward: companies use cash to buy their own stock, allowing net earnings to be divvied up among a smaller number of shares.
With limited growth opportunities in a low interest rate environment, many CFOs have argued buying back stock is the best way to boost shareholder value in the near-term.
While buybacks have been booming since the financial crisis, they have leveled off lately.
“Dollar-value share repurchases amounted to $US134.4 billion over the second quarter (July), which represented a 6.9% decline from the first quarter (April) and a 0.4% decline year-over-year,” FactSet’s John Butters notes. “On a trailing twelve-month basis (TTM), dollar-value share repurchases totaled $US555.5 billion, which was approximately flat with the first quarter.”
Few companies have been buying back stock lately.
“The number of companies repurchasing shares dropped from 390 in Q1 to 378 in Q2,” Butters added. “The average number of companies participating in share buybacks since the recession ended in July 2009 has been 357.”
Here’s some more colour on returning cash to shareholders from Butters’ note: “Share repurchase programs have become a very popular way of returning capital to shareholders over the years. In general, the number of companies participating in share repurchases has increased since the U.S. recession. Overall, there have been some interesting trends when it comes to companies’ capital distribution practices … The number of companies in the S&P 500 taking part in both dividends and buybacks over the trailing twelve month period reached 374 (75% of the index), which was the second highest number in the index since at least 2005. Meanwhile, the number of companies that bought back shares and did not pay a dividend reached 65 at the end of July, which was slightly above the average for both 2014 and 2015 (63 companies). The count of companies that did not take part in buybacks or dividends remained at a low level (20 companies), right near the average for the past three years.”
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