- Democratic presidential candidates, Republican Sen. Marco Rubio, and an investment strategist at a major Wall Street firm are among the many who have piled onto corporate buybacks in one way or another.
- Still, an exchange-traded fund that tracks stock-buyback activity keeps sailing to all-time highs.
- That may come as no surprise to those closely watching buybacks, which have soared in recent quarters.
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Buybacks are a political football perfectly suited for 2019.
Debates around them invoke themes for everyone: shades of corporate greed, historic income inequality, images of populism, and the idea that they have propped up the most-hated bull market of all time.
Politicians like Sens. Elizabeth Warren, Bernie Sanders, Chuck Schumer, and Marco Rubio have derided buybacks’ explosive rise due in large part to the Trump administration’s tax cuts, demanding Congress more fairly regulate what public companies can do with their cash.
“Corporate self-indulgence has become an enormous problem for workers and for the long-term strength of the economy,” Sens. Sanders and Schumer wrote in a New York Times op-ed in February, which was met the following month with an opposing piece in the paper.
By the same token, Wall Street strategists, economists, academics, and business leaders have waded into the discourse. Former Goldman Sachs CEO Lloyd Blankfein weighed in on the practicein February, and a month later The Wall Street Journal’s editorial board called the debate a “stock buyback panic.”
The pressure on buybacks, which hit a record $US806.4 billion in 2018 according to an estimate from S&P Dow Jones Indices, isn’t expected to let up.
“The current political debate around share repurchases increases uncertainty around our buyback forecast,” David Kostin, the chief US equity strategist at Goldman Sachs, said in a note to clients out Friday. “Given the lack of specific policy proposals, it is difficult to quantify how potential legislation might affect spending on buybacks.”
Kostin himself has become a prominent voice in the debate over whether share buybacks need reining in. He’s repeatedly aimed to dispel “misconceptions” about share repurchases, warning a “world without buybacks” would usher in heightened stock volatility and depressed stock multiples.
Meanwhile, none of the rhetoric and uncertainty has meant a thing to the market.
The Invesco Buyback Achievers ETF, which tracks US corporate share repurchases through an underlying Nasdaq index, hit a record high on Monday. The ETF is up nearly 20% so far this year, outpacing the S&P 500‘s 16% gain.
Holdings of the ETF must have executed a net reduction in outstanding shares of 5% or more in the past year. They also must be incorporated in the US or certain “benefit-driven incorporation countries.”
Right now, tech makes up the lion’s share of the ETF’s 173 stocks, commanding 28% of the fund. Consumer discretionary stocks and financials round out the top three at 18.5% and 18%, respectively. The biggest holdings? Citigroup,Apple,Cisco,Oracle, and Union Pacific.
Bank of America Merrill Lynch chief investment strategist Michael Hartnett noted earlier this month that buybacks have reached “bubble” territory, fuelled by the very political threats that surround them.
“Buyback bubble: US buybacks +22% YoY in Q1 to est. $US270bn; irony of 2019 is threat of populist policies in 2020s to reduce buybacks & inequality will likely increase buybacks in 2019 as corporations rationally front-run populist policies,” Hartnett wrote.
He concluded that the activity is another bullish “catalyst” for the stock market.
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