Will the Record-Setting Buyback Trend Continue in 2019?

Michael Schoonover, COO & Portfolio Manager
Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC and Rational Advisors, Inc. and Portfolio Manager of a share buyback strategy fund at Catalyst Funds. He began his association with Catalyst in 2011 as a research consultant supporting the implementation and back testing of quantitative strategies. In March 2013, he became a senior analyst at Catalyst to provide investment research for several mutual funds. From 2005-2011, he served in various technical and scientific management roles with the Perrigo Company. Mr. Schoonover has an MBA with high distinction from the University of Michigan Ross School of Business and a BS from the University of Michigan.

Favorable Environment May Fuel the Trend

U.S. companies have announced more than $969 billion in buyback authorizations as of December 6, 2018, and a few more large announcements could push that number over the $1 trillion threshold. The record value of buybacks announced thus far in 2018 has already significantly surpassed the $813 billion in buybacks set in 2015.

An examination into the buyback activity this year suggests that there’s a significant number of buyback opportunities that have yet to be announced. With reduced tax rates, the ability to repatriate cash, and a stable economy fueling these buybacks, investors shouldn’t be surprised if the record-setting buyback environment continues in 2019.

With $969 billion in announced buyback authorizations, 2018 has already been a record-setting year.

One might assume that the number of buyback announcements has also skyrocketed. However, U.S. companies have only announced slightly more than 800 buybacks this year, below the yearly buyback announcements from 2014 to 2016 and only slightly above the announcements in 2017. Historically, it would have required about 1,300 buyback announcements to get to today’s $969 billion value, when in fact we’re only at about 60% of that number.

The number of buyback announcements this year is far lower than expected.

Furthermore, the actual number of companies announcing buybacks has also decreased. Out of all companies in the Russell 3000, only 637 have announced a buyback in 2018; again, lower than the number of companies per year in 2014-2016.

Between 2011 and 2017, there was a trend where an increasing number of companies accounted for the total number of buybacks (measured by average announcements per company). For example, in 2011, there was an average of 1.57 buyback announcements per company. This dropped steadily to 1.13 announcements per company in 2017. In 2018, this trend has suddenly reversed and is currently at 1.27 announcements per company.

2018 has marked a reversal in the trend since 2011 for more companies to participate in buyback announcements.

The favorable environment for buybacks (lower taxes, etc.) explains why there is such a large value of announced buybacks compared to a small number of companies announcing. It also highlights a growing trend for companies to adopt buybacks versus dividends as an “option” to return excess capital to shareholders because it is more beneficial to the company and investors.

However, issues such as trade war concerns and stocks trading near record-highs for most of the year may have caused many companies with buyback capacity to stay on the sidelines. As time passes and cash stockpiles build from a more favorable tax structure, more companies may start to participate in the buyback announcements. Additionally, the return of market volatility allows more companies to opportunistically announce a buyback. Finally, any path towards resolution in the trade war could also fuel a significant increase in buyback announcements.