Chartology: February 2019

This month’s edition of “Chartology”, features Chief Investment Officer Dmitriy Katsnelson discussing stock buybacks.

February 2019 Chartology from Bronfman Rothschild on Vimeo.

In this Chartology we’re tackling a somewhat contentious topic, which is U.S. share buybacks. Now when you hear about share buybacks, particularly in the media as of late, the conversation is really around how many billions of dollars U.S. companies are spending buying back stock, instead of potentially paying down debt, paying higher wages, or investing in other businesses.

But before we really get into whether buybacks are good or bad, we want to provide a bit of context to the conversation. Most of the media focus is on the absolute number, and you can see on the chart here in 2018 U.S. companies spent 770 billion dollars on share buybacks, which, if you look at absolute terms, it’s the highest on record. 2007 was pretty substantial at $589 billion, but obviously not as high as 770. But that absolute number is hiding something, which is what’s happened to the U.S. market over this period of time.

The reality is the U.S. market is substantially larger than it was in 2007 and even in 2001. We are currently at $25 to $30 trillion market. Back in 2001 we were a 10 trillion-dollar market. So when we look at buybacks, we really focus on that white line. The white line shows us what percentage of the market cap is being bought back every year. And when you look at it from that context, the peak was really back in 2007—we were approaching almost 5%. The latest number, although substantial, is still below 4%. So when we think about share buybacks, it’s not those absolute numbers that are relevant. We really look at it from a relative perspective. So although 2018 was a pretty robust year for share buybacks, it’s pretty much on par what we’ve seen over the past five or 10 years.

So the next question is “Are share buybacks good or bad?” And the answer is: it depends. With regard to share buybacks, it really depends on the price paid, the competency of the management team that’s really implementing the buying, and what were the alternative options. As investors, we like to see share buybacks when there is no better alternative. If buying back stock at a reasonable price is a better investment for the company and for the shareholder than potentially paying down debt at a very low interest rate or investing in a non-core business, or even buying a non-core business, we really would rather see the company spend their money more wisely and buy back shares.

That of course cannot be the answer at all times. There are times where companies overpay for their stock. There’s also times where companies borrow significant amounts of money to buy back stock at market premiums. Those share buybacks are often punitive, and we’ve seen that in the marketplace a lot as of late, where companies have bought back stock at peak valuations and now we’re paying the price in the eyes of analysts and shareholders.

So to sum it all up, when you hear about share buybacks, we really want you to think about it contextually. First, think about it in relative terms, and although $700 billion is a lot, the market is a lot larger today than it was in the past. And second, when you think about whether it’s a good or bad spend of money, it really does depend on the situation. So when you hear about share buybacks in general, hopefully you’re not looking at it as all good or all bad.

We hope you found this useful to bring context to the conversation. If you have any questions about this analysis or any other analysis, please reach out. You can also find us on the web at www.belr.com.


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