In the third quarter of 2021, large American companies bought back their shares for a record amount.. Who spent the most, and that's why it's important for the investor.
Build a factory or buyback?
According to S&P Dow Jones Indices, aggregate buyback of companies from S&P 500 in the third quarter amounted to 235 billion dollars. It's on 18% more, than in the second quarter, and on 130% more, than in the third quarter of 2020. Such volume can be a good sign for investors., after all, buyback indicates the confidence of companies in their own business. But it's not only that.
Compared to 2020, the capital expenditures of companies from S&P 500 up by 21%, up to 189 billion dollars. It's still on 3% below, than at the end of 2019, that is, before the pandemic. Given the near-zero rates and cheap loans, businesses should have invested more actively in their growth, but that did not happen.
One possible reason is uncertainty., caused by COVID-19. Usually companies build factories, upgrade equipment and make other capital investments, when you are confident in the prospects and the economy. Given the likelihood of repeated quarantines, corporations, whose profits have exceeded the pre-pandemic level, decided to spend money on buyback.
Apple, Alphabet и Meta: top-20 buybacks
According to S&P Dow Jones Indices, in the third quarter for a share 20 companies had to 54% of the total buyback. These companies have repurchased $126 billion worth of shares, What's on 118% more compared to the third quarter of 2020.
Traditionally, Apple spent more than others on buyback — 20.4 billion. For the entire fiscal year 2021, the company spent 86 billion on buyouts. This is almost all of Apple's annual profit., which amounted to 94.7 billion. Tech giants Alphabet and Meta also made it into the top three in buyback volume.
Buyback in Q3, billion dollars
| Apple (AAPL) | 20,4 |
| Alphabet (GOOGL) | 15,0 |
| Meta (FB) | 12,6 |
| Oracle (ORCL) | 9,9 |
| Microsoft (MSFT) | 8,8 |
| J. P. Morgan Chase (JPM) | 7,7 |
| Berkshire Hathaway (BRK) | 7,6 |
| Bank of America (BAC) | 5,3 |
| Charter Communication (CHTR) | 5,3 |
| Union Pacific (UNP) | 3,7 |
| Lowe’s (LOW) | 3,6 |
| Home Depot (HD) | 3,5 |
| Morgan Stanley (MS) | 3,3 |
| Procter & Gamble (PG) | 3,1 |
| Citigroup © | 3,0 |
| Walmart (WMT) | 2,8 |
| HCA Healthcare (HCA) | 2,8 |
| Visa (V) | 2,7 |
| Chubb (CB) | 2,6 |
| Mastercard (MA) | 2,6 |
20,4
So what?
Buyback and dividends - two ways, with which companies can reward shareholders. IN 19 century and early 20 for centuries, corporations paid almost all their profits in the form of dividends. Investors of that time looked specifically at the dividend yield of the issuer, especially since then dividends were not taxed.
At the beginning 21 century, with the growth of the tax rate, the share of dividend payments from profit fell to 30%. Companies chose to conduct buyback of shares, including to maintain quotes. According to Standard & Poor’s, in the third quarter of the company from S&P 500 was spent on dividends almost half as much, than buyback, - $ 130 billion.
Repurchasing own shares, the company is reducing their number. As a result, earnings per share grows faster, than the profit. For example, Apple's profits have grown by 107%, earnings per share - per 171%.
And such accelerated growth in earnings per share helps corporations report better than analysts expected.. It also has a positive effect on quotes.. In recent years, buyback has become one of the reasons for the steady growth of markets, albeit artificial.
