Corporations have never been as generous in returning capital to shareholders via buybacks and dividends than they have been this year. For all of 2018, S&P 500 combined share buybacks and dividends will top $1 trillion for the first time.
However, according to a new report from Bank of America, U.S. Trust, this corporate generosity has not done much to boost equities for a number of reasons, ranging from the one-off nature of returns and the overpowering/ negative effects of Federal Reserve (Fed) tightening and simmering U.S.-Sino trade tensions. And investors have not been overly impressed. Even a sum in excess of $1 trillion can’t buy you love in this market.
Money Can’t Buy You Love
U.S. corporations are on pace to return a record $1.2 trillion to shareholders this year via share buybacks and dividends - a staggering sum that ironically has not done much to support either investor confidence in equities or equities themselves.
According to preliminary figures from the S&P Dow Jones Indices, companies in the S&P 500 spent a combined $309 billion on buybacks and dividends in the third quarter of this year, following robust figures in Q2 ($302 billion) and Q1 ($298 billion). A similar figure is expected in the fourth quarter of the year, which would boost the yearly total in excess of $1 trillion for the first time.
However, notwithstanding the outsized giveback on the part of corporations, both the S&P and Dow Jones Industrial Average are up only marginally for the year. Healthy buybacks and dividends are typically supportive of equities, so what gives this time around?
A number of factors could explain the market disconnect. First, this year’s surge in total shareholder returns is likely to be a one-off, supported by large repatriation inflows that trail off next year, so investors have already started to discount lower levels in 2019. Second, as the cost of capital continues to rise, firms will probably resort to more holding of cash/capital next year, versus doling it back to shareholders via buybacks and dividends. Third, the flip side of returning capital to shareholders is soggy capital investment outlays, with business investment expanding by just an 0.8% annual rate in the third quarter, versus 8.7% in the prior quarter. The fear among investors: In deploying their capital, firms are focused on the short term (buybacks and dividends) as opposed to investing long term to boost output and efficiencies. Finally, even with the record spend on buybacks and dividends, fears around excessive Fed tightening and simmering U.S.-Sino trade tensions have overpowered all other market dynamics in Q4, triggering more market volatility and investor uncertainty.
In the end, while corporations have never been as generous in returning capital to shareholders as they have been this year—spreading the spoils or love, so to speak—investors have not been overly impressed. Even a sum in excess of $1 trillion can’t buy you love in this market.
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