Buybacks could be on the way to another record even as politicians try to kill them

Key Points
  • Judging by the early count in the first quarter, share buybacks could be on their way to another record year.
  • Companies announced repurchases totaling just over $1 trillion in their own stock during 2018.
  • Senators on both sides of the political divide have recently targeted buybacks and threatened new legislation to curtail them.

The black eye stock buybacks have received in the halls of Congress lately has not stopped companies from stepping up their announced share repurchases in the first quarter.

In fact, by one count buybacks are on their way to another record this year, potentially topping the just over $1 trillion seen in 2018.

The trend comes amid a clamor in Washington by lawmakers looking to make it harder for companies to buy their own stock and instead direct the money to investments in workers and equipment. Both Democrats and Republicans have been bashing buybacks, saying corporate America is getting an unfair advantage in the tax code that rewards selfish behavior.

New York Democratic Sen. Charles Schumer was on the offensive again this week, posting a new essay on Medium that said companies should find a better use for their cash. Schumer and independent Sen. Bernie Sanders recently outlined a proposal that would force companies engaging in buybacks to provide a living wage and health benefits to all workers. Republican Sen. Marco Rubio of Florida has promised his own proposal to stem the trend.

"To me, this poor income distribution and the ensuing and uncharacteristic lack of hope it creates in the American working class is — along with climate change — the greatest problem America faces," Schumer wrote. "We need solutions, not glib answers."

There's no problem to solve with stock buybacks, says GOP Sen. Toomey
There's no problem to solve with stock buybacks, says GOP Sen. Toomey

The buyback trend started during first-quarter earnings season has been striking.

Bank of America Merrill Lynch estimates repurchases are up 91 percent year over year, with staples and materials leading followed by tech and financials. In fact, the past week saw nearly $2.8 billion, the fourth-highest level since BofAML began tracking the data point in 2009.

"The current pace of buybacks would suggest a record year in [staples and materials] plus Financials and Utilities; Industrials and Discretionary buybacks, while below post -2009 records, are also set to eclipse last year's levels," Jill Carey Hall, U.S. equity strategist at BofAML, said in a note.

That move comes off a big fourth quarter in 2018.

S&P 500 companies that have reported so far are indicating just a 1 percent decline from the record third-quarter buyback levels, with the amount 64.8 percent ahead of the fourth quarter in 2017, according to Howard Silverblatt, senior industry analyst at S&P Dow Jones Indices.

Business investment also growing

However, Silverblatt's data also run counter to the notion that companies are just piling into buybacks and dividends and not investing in their companies.

Capital expenditures are running 13.9 percent higher than the previous quarter and 15.5 percent ahead of the same period a year ago. In fact, Silverblatt said the trend, through the first 63.3 percent of companies reporting, could approach the record level of capex in Q4 of 2016.

Wall Street has come to depend on buybacks along with organic growth for the nearly 10-year-old bull market. While investors have taken about $232 billion out of mutual and exchange-traded equity funds over the past three years, companies have pumped in $1.8 trillion through repurchases, according to Nick Colas, co-founder of Data Trek Research.

"Any real regulation on buybacks, either through labor conditions or tax code, is a negative for valuations and stock prices," Colas said in a recent note to clients.

Despite their current status as low-hanging political fruit, Colas said buybacks can be "better than the alternatives," such as big mergers that often don't work out well for workers, or companies moving operations overseas to escape the labor regulations proposed in a Schumer-Sanders type bill.

"Stock buybacks are deeply cyclical in nature, so the fact that their size has finally drawn DC's attention is a worrying sign of a corporate profit top," Colas wrote. "Legislation on financial issues is almost always reactive, not proactive."