Companies will buy back a record amount of their own shares in 2018, with nearly half the purchases funded with the windfall from the Tax Cuts and Jobs Act, according to a J.P. Morgan analysis.
Investors should keep an eye on who is doling out the biggest level of buybacks, particularly if the stock market continues to experience turbulence.
J.P. Morgan strategists estimate that firms in total will authorize at least $800 billion in buybacks, a whopping 51 percent increase from 2017. Analysts across Wall Street are widely expecting a jump in share repurchases, but J.P. Morgan's forecast is the most aggressive.
Pushing the big increase will be a windfall from the new tax law enactedin December. The legislation cut the corporate tax rate from 35 percent to 21 percent and levied a one-time tax on profits stored overseas that is expected to lead to a high level of repatriation for the $2.5 trillion in offshore cash.
Breaking it down, J.P. Morgan expects companies to dedicate $100 billion generated through tax cuts and resulting stronger earnings plus $200 billion from the repatriation windfall. During the nearly completed fourth-quarter earnings season, companies already have announced a record $151 billion in buybacks.
If the tax incentives aren't enough, the recent correction in the stock market — a 10 percent drop in the major averages — also serves a buyback incentive.
"Corporates tend to accelerate buyback programs during market sell-offs," Dubravko Lakos-Bujas, U.S. head of equity strategy at J.P. Morgan, said in a note to clients. "In fact, our analysis suggests that stocks with higher buyback yields and new announcements outperform relative to sector peers, especially during corrections and recessions."