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Graph of the week

Graph of the week

08-08-2019 | Insight

Record buybacks

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager

Trailing 12-month change in cash & (gross) debt, 1980-2019

Source: Compustat, FactSet, and Goldman Sachs Global Investment Research
I came across the above graph in some recent Goldman Sachs research. It shows the percentage change in cash and debt for S&P 500 companies over the last 12 months, excluding the financial sector from the analysis.

What is striking, of course, is the massive 15% decline in the amount of cash on balance sheets – the biggest drop in 30 years. The key culprit here is companies buying back their own shares. According to Goldman Sachs, some 26% more shares have been repurchased year to date (January to July). Expectations are that this year will see a total of around USD 940 billion in share buybacks – a new record.

One notable detail is that, for the first time since the financial crisis, businesses are returning more money to shareholders than they are generating in free cash flow. Over the last 12 months (18Q1-19Q1), as much as 104% of free cash flows have been spent on share buybacks and on dividend payments.

It is interesting to see how lower rates and expected rate cuts by the Federal Reserve will influence this percentage. It is easier for businesses to make investments when rates are lower, but it is also cheaper to borrow money to buy back their own shares. The rise in debt in the graph above serves as an indication of this.

However, businesses are often very opportunistic. In good times (read: when stock prices are high), they repurchase a lot of shares, but once the party on the markets is over, they suddenly become much more cautious with their buybacks. Even if the repurchase of shares at lower market prices is a far more attractive proposition.

So I'm curious to see the buyback numbers now that the market has taken a breather in recent days!

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