Share-Buyback Announcements Plunge, Stocks Risk Getting Clocked
by Wolf Richter
WolfStreet.com
June 20, 2016
In 2015, S&P 500 companies bought back $569 billion of their own shares, down just a smidgen from $572 billion in 2014, according to FactSet. That’s a combined $1.14 trillion in stock repurchases. With the S&P 500 market capitalization at $18.8 trillion currently, corporate buybacks over the past two years have mopped up about 6% of the total float in dollar terms. And this has been happening year after year with increasing vehemence since 2010.
While some sectors already cut back in 2015, buybacks soared 44% in the Industrial sector and 26% in the Consumer Discretionary sector. Companies buying back their own shares act purposefully as the relentless bid, with the sole goal of driving up share prices. They want to buy high! And it works.
These shares don’t sit in an account waiting to be dumped on the market. Companies cannot sell the shares that they previously repurchased. Selling shares is considered “raising capital,” which requires companies to jump through all kinds of regulatory hoops, often followed by a sell-off. Corporate share repurchases won’t ever reverse and turn into selling pressure. These shares just just evaporate.
So share repurchases add enormous buying pressure. IBM, which most recently reported its 16th year-over-year revenue decline in a row, ending up with its worst quarterly revenues in 14 years, is a master at this. That’s why its stock price magically keeps creeping back up after the post-earnings announcement beat-down.
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