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Written by: Jacob Johnston | Advisor Asset Management
There are numerous things that a company can choose to do with its free cash flow, including paying a cash dividend, buying back stock, paying down debt, reinvesting in the company, or making acquisitions. Capital allocation decisions have evolved as companies prioritize returning capital to shareholders and stock repurchases or “buybacks” have joined dividends as a powerful source of shareholder return. In this week’s Viewpoints we discuss buyback trends, long-term performance data, and positioning within equity allocations.
Trends
Stock buybacks for S&P 500 companies have increased significantly, including a record in 2022 of $923 billion. More recently, aggregate net repurchases totaled $830 billion during the 12 months ending June 30, 2023. The chart below helps visualize the growth.
For comparison, the dollar amount spent by S&P 500 companies on cash dividends during the 12 months ending June 30, 2023, was $576 billion. That fits a trend over recent years in which buybacks have easily outpaced dividends.
Source: S&P Dow Jones Indices. *As of 6/30/23 | Past performance is not indicative of future results.
In the context of shareholder returns, this produced a higher buyback yield than dividend yield when measured against the market value at the beginning of the period.
Source: S&P Dow Jones Indices. *As of 6/30/23 | Past performance is not indicative of future results
Performance
The thesis is a reduction in shares outstanding is potentially supportive of earnings per share, and growing earnings per share is potentially supportive of valuations. Historical performance shows stocks with high net repurchase yields have outperformed over the long the run. The chart below shows performance of S&P 500 stocks grouped by net repurchase yield.
Data going back to 1985 shows the highest quintile (highest net repurchasers) has the highest average annual return of 14.22%. There is a linear relationship as we move down the groups to the lowest quintile (lowest net repurchasers) which has the lowest average annual return of 9.48%. This suggests companies with consistent focus on returning capital to shareholders via repurchases have rewarded investors with higher annual returns, both on an absolute and risk-adjusted basis.
Positioning
The conversation around buybacks is timely as capital allocation decisions have evolved, and there is the potential opportunity to adjust equity allocations to align with all the ways capital is being returned to shareholders. Attractive risk-adjusted returns over the long run has the potential to provide an excellent proof of concept. Furthermore, we believe strategies focused on buybacks complement existing dividend-oriented positions and provide another powerful source of shareholder return.