US Share Buybacks

If the US stock market is over-valued, then how come stock prices keep going up?

In my blog dated Nov. 30th, I discussed QE's timeline and wrote that over the 6 years ending in October 2014, the total amount of intended and actual QE were approximately $5 trillion and $4 trillion, respectively. Expressed in terms of a monthly rate, these figures translate to $68bn and $54bn, respectively. 

In that same blog, I estimated that the cumulative amount of QE was about half of after-tax corproate profits during the same period.

In this blog, I compare the scale of QE to US share buybacks, which is the act by which a company whose stock is publicly traded enters the market and buys its own shares. The effect is that its share price rises, all else being equal.  My data comes from an article published in the Financial Times on Dec. 5, 2014, page 24.

According to the article, since the start of 2010, companies have spent $3.3 trillion on share buybacks and dividends. Expressed in terms of a monthly rate (so as to be comparable to QE's rate), this figure translates into $56bn. (I wish they had broken this out between buybacks and dividends, but they don't. They only provide a chart from which I can crudely estimate that buybacks represent 2/3 of this figure, or under $40bn per month. The article itself quotes a monthly rate of $40-$50bn.)

So, we have QE at a monthly rate of more than $50bn and US share buybacks at the monthly rate of $40bn. Buybacks have been a force to reckon with.

Now, how does the scale of buybacks compare to the scale of investors' purchases of stocks?

According to the same article, over the past 5 years, i.e. over the same period as for which I reported US share buybacks, US investors have poured $301.5bn into domestic equity exchange traded funds. However, redemptions from US stock mutual funds have been $411.1bn. Taken together, this means that net outflows from the US stock market have been more than $100bn. This figure translates into a monthly rate of $1.8bn out of the stock market.

So, we have US share buybacks at the monthly rate of $40bn versus redemptions at the monthly rate of $1.8bn. The latter figure is less than 5% of the former figure. The dominant force has been US share buybacks, by more than 20 times! It probably mattered little how investors voted with their money, and note that investors voted in the opposite direction of US share buybacks.

Here some interesting observations:

1. About 1/4 of S&P 500 members reduced their share count by more than 4% in the 3rd quarter, up from 1/5 during the first 3 months of the year. (The 4% level is significant as it affects price/earnings ratios, according to the article.)
2. Nearly 1/4 of all share buybacks occur in November and December.
3. The largest US share buybacks in the past 12 months have been as follows:
1. Apple: $45.0bn, share price up 45% in past 12 months, 18 p/e, $115 latest share price
2. IBM: $15.7bn, down 5%, 10 p/e, $163.27
3. Exxon: $13.2bn, up 2%, 12 p/e, $93.82
4. Cisco: $9.1bn, up 36%, 19 p/e, $27.50
5. Oracle: $8.8bn, up 22%, 18 p/e, $41.93

US share buybacks would be one way to answer those who ask, "If the US stock market is over-valued, then how come stock prices keep going up?"

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