Corporate America primed to join Buffett in buyback binge

San Francisco

THE recent rise in interest rates may be causing nervousness among some investors, but it's unlikely to prevent a buying binge among the biggest whales in the stock market: corporations themselves.

US companies' swollen cash piles and a rosy outlook for earnings are raising expectations that more executives will follow in the footsteps of Warren Buffett and unleash a spree of share repurchases, adding a layer of support to the stock market after buybacks plummeted last year. At the very least, the purchases could help offset a surge in supply of shares this year by a parade of special acquisition companies going public and a record number of secondary offerings.

"When you see cash flow accelerate, you see buybacks follow shortly thereafter," said Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. "There's a tremendous amount of cash sitting out there with nowhere to go."

S&P 500 companies entered this quarter with more than US$2.2 trillion in cash and Wall Street is projecting 24 per cent earnings growth in 2021, according to data compiled by Bloomberg.

Repurchases among companies in the benchmark index have already shown signs of rebounding. Buybacks rose to US$120 billion in the last three months of 2020, up 28 per cent from the previous quarter, according to data compiled by Bloomberg. For the first time since the Covid-19 crisis, more than half of the index bought back shares. Still, buyback activity remains well below pre-pandemic levels of US$197.7 billion recorded in the first three months of 2020.

Should buybacks return to average levels over the five years prior to 2020, repurchases would expand by nearly 50 per cent in 2021, according to Ms Adams. In a survey conducted by RBC Capital in mid-March, about 60 per cent of analysts said buybacks are a priority for management teams looking to deploy cash. Only dividends received a higher score of 76 per cent, the bank's head of US equity strategy, Lori Calvasina, said in a note to clients.

Not everyone is bullish on the buyback effect. While repurchase activity is poised to increase this year, it's unlikely to reach levels seen before the pandemic thanks to high price-to-earnings multiples and waning investor enthusiasm for buybacks, according to Bank of America equities strategist Jill Carey Hall. Rising corporate buying will also be muted by a boom in companies raising money by selling shares, Ms Hall said in an interview.

Technology companies, many of which saw business boom over the past year, have remained steadfast in their buying relative to other industries. Tech accounted for 44 per cent of total buybacks in the S&P 500 in the fourth quarter, up from 27 per cent in the same period a year ago. Sectors that drastically cut buyback activity, such as consumer discretionary and industrials, are poised to snap up more shares as earnings improve, Ms Adams said. BLOOMBERG