Via SeekingAlpha.com

By Philip Lawlor, managing director, head of Global Markets Research

Stock buybacks have been a major driver of shareholder returns in the US for the past several years. The pandemic threatens to pull the plug on that.

As the chart below shows, US gross buybacks have grown more than six-fold since the depths of the 2008 financial crisis. This bit of financial engineering really took off after the massive US corporate tax cut in late 2017, peaking at $248 billion in Q4 2018, as companies took advantage of newfound cash windfalls and ultra-low borrowing costs to repurchase their own shares. (By reducing share count, buybacks boost EPS and, in turn, price/EPS multiples, all else being equal.)

US non-financial corporate debt vs gross share buybacks (USD, billions)

Source: FTSE Russell / Refinitiv. Data as of May 20, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

The chart below, which compares US national income and profit account (NIPA) corporate profits recorded by the Department of Commerce (gray line) with consensus 12-month forward EPS forecasts (blue line), illustrates how much buybacks have influenced EPS growth—and market perceptions—in recent years.

US “Main Street” vs “Wall Street” non-financial profits (rebased)

Source: FTSE Russell / Refinitiv. Data as of May 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

The gap between the two has narrowed significantly this year as buyback activity has tapered off. This trend looks likely to accelerate as the extreme pressures on cashflows from the pandemic’s economic toll and anticipated slow recovery (as well as increase in deleveraging) prompt an even deeper freeze in stock repurchases.

Such a pullback, particularly among financials (which have been the second-highest source of repurchases among Russell 1000 sectors next to technology), poses a risk to post-lockdown EPS expectations and a potential headwind for equity returns.

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Russell 1000 share buybacks by sector over the last 12 months (USD, billions)

Source: FTSE Russell / Refinitiv. Data as of May 15, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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