Q2 Buybacks Smallest Quarterly Total Since 2013 by Andrew Birstingl, Research Analyst – FactSet

Companies in the S&P 500 spent $125.1 billion on share buybacks during the second quarter, which marked the smallest quarterly total since Q3 2013. This comes after a first quarter that saw buybacks for the index hit a new post-recession high. Aggregate buybacks in Q2 represented a 6.8% decline from the year-ago quarter, which was the largest year-over-year decrease since Q1 2015.

Q2 Buybacks

This Q2 decline came during a quarter that saw the S&P 500 index hit record-high price levels. On a trailing 12-month basis, shareholder buybacks amounted to $592.9 billion at the end of the second quarter. This was a 6.8% increase from the same time period a year ago. The TTM buyback total at the end of Q2 marked the fourth largest amount going back to the start of 2005, despite this quarter’s decline.

Buyback Participation Falls Sharply in Q2

The number of S&P 500 companies participating in buybacks fell sharply in Q2. During the quarter, 350 companies engaged in share buybacks, which was a significant decrease from the 380 participants in Q2 2015. The second quarter marked the lowest buyback participation rate since Q4 2010, when only 337 firms in the index performed share buybacks. Over the last 12 quarters, the average number of S&P 500 companies repurchasing shares was 381.

Number of Companies Making Large Repurchases Nears Three-Year Low

The number of S&P 500 companies making repurchases that exceeded $1 billion was 33 in Q2. Although this represented a slight uptick from the year-ago quarter (30 companies), it was still the second lowest count in the past three years (after Q2 2015). It was also a large drop from the first quarter, which saw 41 companies in the index each buy back more than $1 billion worth of their own stock.

Apple and General Electric Top the List of Buyback Spenders

Although aggregate share buybacks declined in the second quarter, there were still some big spenders in the index during Q2. Apple was the top spender on share buybacks in Q2. The iPhone maker repurchased $10.9 billion worth of shares, which represented a 9% increase from the year-ago quarter. The buybacks helped contribute to a 5.5% year-over-year reduction in its shares outstanding.

Related:  Apple Estimates Unmoved by Product Announcements

General Electric was the second top spender on share buybacks during the quarter. The company bought back $7.6 billion worth of shares in Q2, after repurchasing less than $150 million of its stock in the year-ago quarter. General Electric has repurchased approximately $17 billion out of its massive $50 billion repurchased program, which was funded by the sale of GE Capital. These buybacks helped reduce the firm’s shares outstanding by 11.2% year-over-year.

Top 10 Companies by Dollar-Value Buybacks – Q2 2016
Ticker Company Sector Quarterly
Buybacks
($M)
QOQ% Chg In Shares Out Quarterly
Dividends
One Year Total Return
AAPL Apple Inc. Information Technology $10,900 (1.6%) $3,187 0.8%
GE General Electric Company Industrials $7,588 (2.5%) $2,274 19.1%
MSFT Microsoft Corporation information Technology $3,600 (0.8%) $2,821 32.8%
ABBV AbbVie, Inc. Health Care $3,421 0.7% $927 10.5%
MCD McDonald’s Corporation Consumer Discretionary $3,289 (2.8%) $759 20.4%
AIG America International Group, Inc. Financials $2,762 (4.2%) $350 0.5%
JNJ Johnson & Johnson Health Care $2,368 (0.5%) $2,197 28.6%
WFC Wells Fargo & Company Financials $2,214 (0.5%) $2,259 (12.8%)
WMT Wal-Mart Stores, Inc. Consumer Staples $2,049 (0.9%) $1,560 16.1%
BA Boeing Company Industrials $2,003 (2.2%) $691 (4.7%)

 

Buybacks Represent 71.5% of Earnings; Shareholder Distributions Make Up 123% of Earnings

At the end of the second quarter, trailing 12-month share buybacks made up 71.5% of net income, which represented a 16.6% uptick from the ratio a year ago. On a quarter-over-quarter basis, the ratio moved slightly lower as a result of the sequential decline in Q2 buybacks. In general, buybacks as a percentage of earnings still remain at a high level for the index. Looking at the past eight quarters, the average ratio was 64.3%, making the ratio at the end of Q2 an 11.2% premium to the two-year average. Additionally, the percentage of TTM buybacks to earnings marked the second highest ratio since Q3 2009.

Related: Q1 Buybacks Break Post-Recession Records

This will be a key ratio to keep an eye on going forward. Analysts are currently projecting that S&P 500 earnings for Q3 will experience a 2.3% year-over-year decline. Earnings growth is not expected to return until the fourth quarter. However, earnings declines for the index do not necessarily mean that spending on buybacks will follow suit. Remember that Q2 2016 marked the fifth consecutive quarter of year-over-year earnings declines, yet dollar-value buybacks still hovered near record amounts in Q1 2016 and Q3 2015.

Q2 Buybacks

Additionally, while earnings for the index were declining, aggregate debt for the S&P 500 companies was rising. At the end of the second quarter, total debt for companies in the S&P 500 hit its highest level in at least 10 years. Some of this debt issued by firms was used for the purpose of repurchasing more shares. This practice could become more expensive if the Federal Reserve decides to raise interest rates in the coming months.

Buyback Spending Exceeds Earnings for 137 S&P 500 Companies

At the end of the second quarter, 137 companies in the S&P 500 spent more on buybacks in the trailing 12 months than they generated in earnings. This marked the eighth highest count since the beginning of 2005.

Q2 Buybacks

Shareholder Distributions Make Up 123% of Earnings

It is also interesting to look at this ratio for total shareholder distributions, which includes gross share buybacks and dividends. For the trailing 12 months ending in Q2, shareholder distributions made up 123% of aggregate earnings for the S&P 500, which was the largest post-recession ratio aside from Q1 2016. Shareholder distributions have exceeded earnings on a TTM basis since Q2 2015. Keep in mind that Q2 2015 was the start of the five consecutive quarters of year-over-year declines in earnings for the S&P 500 index.

20% of S&P 500 Companies Reduced Year-Over-Year Share Count by More Than 5%

Aggregate shares outstanding for the S&P 500 index declined 0.7% year-over-year in the second quarter.  Approximately 20% of the index reduced their shares outstanding by more than 5% in Q2 compared to the year-ago quarter. This represented a significant increase from the 15% of the index that lowered their count by this amount in Q2 2015 versus Q2 2014

FactSet Buyback Quarterly Report

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