The recent rise in interest rates may be causing nervousness among some investors, but it is unlikely to prevent over-buying among the biggest whales in the stock market – the corporations themselves.
US companies’ inflated cash stacks and pink profit prospects raise expectations that more executives will follow in the footsteps of Warren Buffett and trigger a stock buyback recession, adding a layer of support to the stock market after the bounty falls last year. At the very least, the purchases could help offset an increase in this year’s stock offer by a parade of special acquisition companies and record number of secondary bids.
“When you see the cash flow accelerate, you’ll see the rewards happen soon after,” said Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist. “There’s a lot of cash sitting out there where not to go.”
S&P 500 companies entered this quarter with more than $ 2.2 trillion in cash and Wall Street did projecting 24% profit growth in 2021, according to data compiled by Bloomberg.
Repurchases between benchmark companies have already shown signs of rebounding. Rewards rose to $ 120 billion in the last three months of 2020, up 28% from the previous quarter, according to data collected by Bloomberg. For the first time since the Covid-19 crisis, more than half of the index recovered shares. However, repurchase activity remains well below the pre-pandemic levels of $ 197.7 billion recorded during the first three months of 2020.
If rewards returned to average levels during the five years prior to 2020, repurchases would increase by almost 50% in 2021, according to Adams. In a survey conducted by RBC Capital in mid-March, approximately 60% of analysts said amortization is a priority for management teams who want to deploy money. Only dividends received a 76% higher score, the bank’s head of US equity strategy, Lori Calvasina, said in a note to clients.
“US equities will be strong in 2021, supported by a recovery in depreciation, solid dividends, a recovery in margins and strong fundamental financial support,” he wrote, while noting that costly valuations are likely to limit gains.
Silenced effect
Not everyone is bullish on the repurchase effect. Although repurchase activity is set to increase this year, it is unlikely to reach pre-pandemic levels due to high income prices and declining investor enthusiasm for repurchase, according to Bank of America Corp. equity strategist Jill Carey Hall. The increase in corporate purchases will also be silenced by a boom in companies raising money by selling shares, Hall said in an interview.
The bank’s corporate customers repurchased $ 3.7 billion in stock last week, the second-highest total recorded, Hall and his partner Savita Subramanian wrote in a research note. Purchasing has been led by technology companies, but sectors such as healthcare, discretionary consumption and financing have accelerated purchases.
Technology companies, many of which have experienced a business boom over the past year, have stood firm in their buying relative to other industries. The technology accounted for 44% of the total repurchase of the S&P 500 in the fourth quarter, compared to 27% in the same period last year. Sectors that drastically reduce repurchase activity, such as discretionary consumers and industry, are poised to get more shares as profits improve, said Bloomberg Intelligence’s Adams.
The best buyer
The largest buyer has been Apple Inc. The technology giant recovered $ 24.8 billion shares last quarter, more than the next four largest buyers combined, according to Bloomberg data. The iPhone maker could set the tone next month when it typically updates investors on its capital return plans along with second-quarter tax gains.
Of course, some investors misjudge companies by putting in cash to buy their own shares instead of investing in things like acquisitions or research and development. Still, even Buffett is a fan these days. The head of Berkshire Hathaway Inc., which has been critical of rewards in the past, spent more than $ 24.7 billion in cash on his company’s repurchase in 2020 and praised Apple’s purchase of the Berkshire’s involvement in the company.
Berkshire Hathaway has continued to acquire its own shares in 2021 and is likely to buy more, wrote the billionaire investor in its annual publication shareholder letter last month.
“The process offers an easy way for investors to have a growing portion of exceptional companies,” Buffett said before quoting Mae West: “Too good can be … wonderful.”
– With the assistance of Tom Contiliano and Elena Popina