With February 2015 seeing $118 billion in repurchase authorization announcements, at the current pace, the year is on track to reach nearly $800 billion in repurchase announcements, notes Goldman Sachs.
David J. Kostin and team at Goldman Sachs in their March 6, 2015 research report the US Weekly Kickstart anticipate S&P 500 dividend growth of 7% to $404 billion.
Last 2 months – A record start for share repurchase
With S&P 500 trading at a high valuation relative to history, the Goldman Sachs analysts believe stocks that return cash to shareholders via buybacks and dividends should outperform. The analysts point out that the average shareholder yield for the S&P 500 equals 5%, roughly evenly divided between buybacks and dividends.
However, as can be deduced from the following graph, the Goldman Sachs analysts’ sector-neutral basket of 50 firms with the highest total shareholder return has a median buyback and dividend yield of 12%.
The following table captures the Goldman Sachs total return to shareholder basket split across buyback and dividend:
The analysts note the basket has returned 4.6% YTD and 18.6% during the past 12 months, compared with 2.4% and 14.4% for the S&P 500 respectively.
The Goldman Sachs analysts point out that February 2015 was the most active month on record for share repurchase authorizations with $118 billion. Tracking the past data, they note January and February combined for a record start to any year, with a total of $152 billion in authorizations, ahead of Jan-Feb 2007 at $139 billion and Jan-Feb 2013 at $138 billion.
David J. Kostin et al. point out that it is still early in the year, but at the current pace 2015 is on track to touch nearly $800 billion in repurchase announcements based on the seasonal patterns of the past decade, which would make it the second most active year on record, behind only 2007 ($863 billion).
Repurchase announcements: Cash return could exceed $1 trillion in 2015
The Goldman Sachs analysts emphasize that buybacks will remain the major source of demand for U.S. shares. They anticipate S&P 500 firms will boost repurchases by 12% to $605 billion. They believe Information Technology, Consumer Discretionary, and Financials sectors will account for over 50% of total buybacks. They anticipate dividend growth of 7% to $404 billion. They expect aggregate cash returned to shareholders will exceed $1 trillion in 2015. Of course, the big question is why did companies wait until six years after the bull market started and prices are inflated to buyback shares? And is this the best allocation of capital? The answer to the first question is obvious, the second question is up in the air – but many value investors will be skeptical.
Kostin and colleagues offer another investment recommendation — the Nasdaq 100. As can be seen from the following graph, Nasdaq 100 (NDX) trades at 18.8x forward earnings and a near decade-low relative P/E of 1.1x versus S&P 500.
The analysts point out that the 10% point gap in expected EPS growth (15% vs 5%) is unusually large. They highlight that NDX typically outperforms from this relative growth and value starting point.
Highlighting their third investment recommendation, the Goldman Sachs analysts note Japan also offers equity investors a combination of value and growth, provided a U.S.-based investor hedges the FX rate. Despite TOPIX rising 82% since PM Abe came to power in December 2012, the analysts believe Japanese equity valuations remain attractive.
As set forth in the following table, the Goldman Sachs’ Japan equity strategist Kathy Matsui forecasts the TOPIX will post 22% EPS growth in 2015 (FY ending March 2016) and 9% growth in 2016 (FY 2017). Interestingly, growth in both years will exceed the 8% EPS growth for the S&P 500.