What Current Buyback Levels Mean For The Bull Market
Anyone that has owned stocks recently has likely noticed that share prices are not the only things that have been on the rise: dividends and buyback hikes have been a routine occurrence.
But what do the aggressive capital return programs say about the state of the bull market and the U.S. economy?
According to Factset, S&P 500 companies spent $564.7 billion on buybacks over the past 12 months, a year-over-year (Y/Y) increase of 18 percent. Overall, 362 out of the 500 companies (72 percent) participated in buybacks in 4Q14.
Apple Inc. (NASDAQ: AAPL) led the buyback charge in Q4, spending $6.1 billion in share repurchases during the quarter, a $1 billion Y/Y increase.
Other companies that saw big Y/Y increases in buybacks in Q4 include Intel Corporation (NASDAQ: INTC) (+$3.5 billion), Johnson & Johnson (NYSE: JNJ) (+$2.3 billion), Wells Fargo & Co (NYSE: WFC) (+$1.9 billion) and Yahoo! Inc (NASDAQ: YHOO) (+$1.9 billion).
Over the past 12 months, Apple’s $56.9 billion in buyback spending has dwarfed Exxon Mobil Corporation (NYSE: XOM)'s ($13.3 billion), which took second place.
Not only are companies buying back stock, 420 out of the S&P 500 (84 percent) currently distribute dividends. In fact, more than half of the S&P 500 (55 percent) currently participate in both buybacks and dividend payments.
According to the most recent numbers, 55 percent of S&P 500 companies currently generate a shareholder yield (dividend yield plus buyback yield) of greater than 3.0 percent.
What Does It Mean?
Although the current level of buyback activity has not exceeded 2007’s pre-Financial Crisis peak levels, it is now within a stone’s throw of all-time highs.
This type of activity has many market participants worried that the current bull market is reaching its peak. However, Leav Graves, founder of Option Samurai, told Benzinga that he doesn’t believe that current buyback levels are a cause for concern.
“Many people have tried to call 'tops,' and the fact that we are straggling with making new highs in the S&P, combined with high PE and other measures (like buybacks), makes it very tempting to call a top,” Graves explained.
However, he believes that low interest rates and record profits will keep share prices on the rise for now. “I think the market is still bullish, as long as interest rates are going to stay low.”
For now, companies like Apple and Exxon have no better place to put their excess cash than back into the hands of shareholders.
Until interest rates start climbing and/or profits start falling, these shareholders can simply sit back and enjoy the yield.
Disclosure: the author owns shares of Wells Fargo.
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