Buybacks, whereby companies return cash to shareholders by purchasing their own stock, have been running at near record levels, as The Economist’s Buttonwood columnist points out. The number of shares in issue on American stockmarkets has fallen by around 6% since 2009, according to BCA Research. But the tide is turning.
In the first quarter, only $144bn was spent on buybacks, down from $159bn in the first three months of 2014. The main reason is a downturn in profit growth, so firms have less money for buybacks. Earnings per share (EPS) are expected to decline by 3% year-on-year in the second quarter of 2015.
Meanwhile, stock prices have reached record highs, and this has brought forth new supply: last year was the biggest year for flotations since 2000. All this suggests US stocks are losing an important tailwind: buybacks not only drive stock prices up, but also artificially inflate EPS as they reduce the amount of shares in circulation.