Funded by Debt: Since 2012, share buybacks totaled $5.5 trillion, corporate debt soared by $4.7 trillion.
By Wolf Richter for WOLF STREET.
They’re back big time. Three of the big four banks are back – while Wells Fargo keeps getting slapped on the wrist – after all four were out of it last year due to pandemic-rated financial restrictions. Intel fell out of it. But the rest of Big Tech is in, and Apple bigger than ever. Warren Buffett’s Berkshire Hathaway, after rightfully dissing share buybacks for years, has become one of the largest share buyback queens. And Charter Communications has jumped into it massively.
The top 10 companies – ranked by their cumulative buybacks over the past five years – bought back more of their shares than ever in Q2: $85 billion, according to S&P Dow Jones Indices this week, accounting for 43% of the total share buybacks by all S&P 500 companies. Since 2014, these 10 companies bought back $1.13 trillion of their own shares.
The two surges in the chart below – first after the corporate tax cuts in 2017, and second after Q2 2020 – quadrupled the quarterly rate of share buybacks for these 10 companies from around $20 billion a quarter in the four years through 2017, to $85 billion in Q2 (data via YCharts.com):
The top 10 share buyback queens, based on their share buybacks in Q2 2021:
|Top 10 Companies, Share Buybacks in Billion $|
|Q2 2021||12 months||5-year total|
Rounding out the top 20 are, in that order: Lowe’s, Home Depot, Morgan Stanley, P&G, Citigroup, Walmart, HCA Healthcare, Visa, Chubb, and Mastercard. Wells Fargo and Intel, which used to be in the Top 10, have fallen off the list entirely.
In total, 294 of the S&P 500 companies reported buybacks in Q2 of at least $5 million, down from 335 companies in Q1 2021. But the top 10 did the lion’s share of buying.
Combined, they bought back $199 billion of their own shares in Q2, the fourth largest amount ever, behind the records in the three quarters through Q1 2019, following the corporate tax cuts (blue columns in the chart below).
Since the beginning of 2012, the S&P 500 companies have bought back nearly $5.5 trillion of their own shares, with the top 10 share buyback queens accounting for 25% of it.
But in recent years, this has gotten a lot more top heavy. In Q2 2021, the top 10 accounted for 43%.
But without the Top 10 share buyback queens, the share buybacks by the remaining 284 companies amounted to only $114 billion (red line), roughly flat with Q1, and below most quarters in prior years – that’s how top-heavy this scheme has become:
Even today, as crazy as this sounds, the $5.5 trillion that the S&P 500 companies incinerated on buying back their own shares is a lot of money. They could have been invested in expansion projects in the US, and in labor in the US, rather than in cheap labor overseas, and in training, or god forbid, the companies could have tried to somewhat less aggressively dodge US income taxes, and pay a little more, given that the US government deficit has been horrendous for years, and has become more horrendous with the corporate tax cut of 2017, and has become a lot more horrendous starting in March 2020
Along with share buybacks comes the corporate debt, and it has ballooned as many companies borrowed heavily to fund the share buybacks.
Nonfinancial corporate debt (bonds and loans outstanding, owed by companies other than lenders) spiked in the first half of 2020 and in Q2 reached a new record of $11.2 trillion, having soared by 73% over the past eight years. The $5.5 trillion incinerated on share buybacks played a large role in creating this debt:
The primary purpose of share buybacks is to undo the dilution of their EPS metric that occurs due to massive executive stock-based compensation packages. These share buybacks hide the cost of stock-based compensation on EPS; and many of those share buybacks are funded with debt, but debt doesn’t impact EPS.
In terms of actually lowering the share count: Only 5.4% of the companies that did share buybacks reduced their share count by at least 4% year-over-year, according to S&P. This 5.4% share was down from a 17.8% share a year ago, and from the 28.2% share in Q1 2016.
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