One month ago, Goldman warned that the biggest risk for the market was the stock buybacks hiatus due to earnings season, which in turn resulted in what was almost a modest market selloff, before someone stepped in to buy: we say someone”” because we know for a fact it wasn’t retail or institutional flow, which has been pulling out of the market at the fastest pace in years…
So, yes “someone” – call it BOJ taking advantage of the CME’s “Central Bank Incentive Program” to buy E-minis, or call it Citadel spoofing the ES higher with the explicit blessing of the NY Fed’s Chicago office, it doesn’t matter. Point is stocks are higher even as actual flows are reversing.
However, while preserving the farce of the S&P’s relentless rise no matter the earnings recession, the 1% GDP or the negative funds flow, has been entirely a central bank mandate in the past month (one which will soon inlude the PBOC), the good news for the BOJs and the NYFeds of the world is that the stock buyback hiatus is almost over, and starting this week the bulk of companies can come right back and proceed to repurchase their stocks at all time highs.
And what a come back it will be. According to Goldman, the pace of buybacks is now absolutely off the charts, with nearly $1 trillion in buyback announcements expected in just this calendar year, a mindboggling number, one which is the same size as the largest annual Fed Quantitative Easing amount in any one year going back to the great financial crisis.
Corporate activity in early 2015 supports our view that the S&P 500 will return more than $1 trillion of cash to investors this year. We forecast an 18% surge in corporate buybacks and a 7% increase in dividends in 2015. S&P 500 repurchase announcements YTD in 2015 have totaled $265 billion, 59% higher than during the same period in 2014 (a 29% rise excluding GE).
Where is the buyback activity most acute?
Information Technology has the highest average buyback yield (5%) and total cash return yield (7%) among the S&P 500 sectors (see Exhibit 3). Telecom buyback yield averages 6% in addition to a market-leading 5% dividend yield. Information Technology, Consumer Discretionary, and Financials accounted for 56% of total buybacks during the last four quarters.
What Goldman does not show is that the biggest seller into the ravenous tech buyback frenzy has been none other than tech insiders, who are dumping record amounts of their own stock to their own company! We explained all of this in “The Nasdaq Has Become The Biggest Circle-Jerk In History.”
What Goldman does show it the absolutely staggering amount of buybacks due this year: at $900 billion in authorized buybacks, this means that not only will corporate America soon be drowning in debt – again – but that corporations are on pace to inject more liquidity into the market than the Fed did at the peak of its QE!
Our corporate trading desk estimates that authorizations will total $900 billion this year, 4% above the 2007 peak of $863 billion. We have witnessed a 23% increase in active orders compared with last year. So far this year 146 S&P 500 firms have announced dividend changes and 142 of the firms boosted their dividend. The average dividend hike has been 15%.
And here something peculiar emerges: Goldman appears to actually be lamenting the relentless buying spree that companies have (and will) unleash of their own stock all with the management’s intent of boosting their equity-linked compensation. It does so by reminding everyone – very vividly – what happened the last time buybacks were this high (pun intended):
Although we forecast strong buyback growth in 2015, US corporations should consider using their cash for other purposes. The S&P 500 P/E multiple stands at the highest level in the last 40 years outside of the Tech Bubble. In 2007, S&P 500 firms allocated more than one-third of their cash use ($637 billion) to buybacks just before S&P 500 plunged by 56%.
Is it legal for Goldman to remind muppets of what happened after the last stock bubble burst? We’ll ping the CFTC on that one…
Conversely, at the bottom of the market in 2009 firms devoted just 13% of their annual cash spending to repurchases ($146 billion). Like investors, many firms are poor market timers.
Yes they are. And speaking of which, isn’t it time David Kostin pushed up his 2100 year end S&P which is now 25 point below the latest print target, and is also on top of his S&P target one year from today?
Until he does, however, he has some advice for companies: stop buying back your stock.
Given current historically high equity valuation and a strong US dollar, for many firms a superior strategic allocation of cash could be overseas M&A rather than share repurchases. As an example, on April 7 FedEx (FDX) announced that it would acquire the Netherlands-based package delivery and logistics provider TNT Express for $4.8 billion, a 33% premium to the last closing price. Although the purchase was made with a long-term view, investors applauded the deal and FDX shares outperformed by 270 bp on the first day and the excess return has persisted.
And in parting, some philosophical words from Goldman’s chief strategist:
The aim of a portfolio manager (and a strategist) is to forecast what will happen, not what should happen. We expect companies will repurchase shares at a robust pace in 2015, and investors will reward these moves. However, from a strategic perspective, managements would in many cases better serve shareholders by pursuing acquisitions. Others have argued for more capital spending. However, capacity utilization is just below the 40-year average of 80% and many industries do not need additional capacity.
Don’t worry Goldman: once the bubble finally bursts and everyone, well mostly companies, hedge funds and central banks – retail checked out long ago – is stuck holding the bag and is desperate to sell to any bid you, like a good FDIC-backed samaritan (and funded with yet another Fed bailout) will be there to soak up all there is to sell. Because the aim of a good reported is to tell what will happen, not what should happen.
