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Stock buybacks declined last quarter, but it's not time to panic yet

Key Points
  • Stock buybacks, which have long been a pillar of support for the market's climb higher, just contracted for the first time in seven quarters, according to data from S&P Dow Jones Indices — indicating that companies are tightening their purse strings.
  • But buybacks had to come back down after record highs because of tax reforms that enabled repatriation, argued Richard Saperstein of Hightower Treasury Partners on Tuesday's "Halftime Report."
  • Aureus Asset Management's Karen Firestone is also unworried: "Remember, we're at an all time high. Perhaps companies — for the first time in a long time — are starting to think about the valuation of their own stocks."

How long can this economic expansion, now the longest in U.S. history, last?

The recent decline in stock buybacks might provide one sign that the end could be near. Buybacks, or share repurchases, have long been a pillar of support for the broader market. But last quarter, for the first time in 7 quarters, there was a slowdown in share repurchasing by companies. In the first three months of the year S&P 500 companies spent $205.8 billion to repurchase stock, down from the previous quarter's record $223 billion, according to data from S&P Dow Jones Indices.

Companies tend to champion buybacks, which reduce the number of outstanding shares available in the market, in order to boost stock prices and therefore return value to shareholders. So a slowdown in buybacks could indicate that companies are tightening their purse strings amidst slowing growth, trade uncertainties, and warnings of a rough earnings season to come.

But it might not all be bad news. Hightower Treasury Partners' Richard Saperstein argued that a slowdown in buybacks is natural since much of the money used to repurchase shares came from tax reforms passed last year.

Those reforms eased restrictions on repatriation, the process through which companies bring their overseas earnings back into the U.S. "A trillion dollars came back and a lot of that money was used for buybacks. So we're coming off a peak as a result of tax reform. Buybacks are naturally going to go down as a result of less money being repatriated. But still having $200 billion, down from $223 billion — that's still a lot of buybacks," he said on Tuesday's "Halftime Report."

When it comes to specific names, Saperstein pointed to Apple's $70 billion in share repurchases last year as a reason why the stock is one of his core holdings. In the first quarter of 2019 Apple bought back $23.8 billion worth of stock, more than any other S&P 500 company.

VIDEO2:1702:17
Apple is a cash cow that should be a core holding in everyone's portfolio, says Richard Saperstein

Rather than lamenting the buyback numbers, Aureus Asset Management's Karen Firestone says to focus instead on where the money not used on share repurchases might be going.

"Remember, we're at an all time high. Perhaps companies — for the first time in a long time — are starting to think about the valuation of their own stocks… We haven't seen a capital cycle really pick up since before the crash. So it's conceivable that they've hired more people," she said.

Mergers and acquisitions, which similarly to buybacks can reduce the number of shares outstanding, are another place to look.

Major U.S. deals this quarter include the merger between United Technologies and Raytheon, and AbbVie's recent acquisition of Allergan. According to Steve Weiss of Short Hills Capital Partners, "U.S. M&A in the second quarter was $460 billion, which is down only 3% from the first quarter... That also shrinks the market and drives the need to put that capital into other stocks. So I think we're okay."