One Trader Takes A Closer Look At The Buyback Bonanza

By Kevin Muir of “The Macro Tourist” fame; reposted here with permission


You had to know that last week’s Barron’s cover was too good for me to pass up. Come’ on. It’s just screaming at me to write a post.


It’s like Lindsay Lohan attending a celebrity vodka launch event – you know no good will come of it, but it will be entertaining, and most likely Lindsay (and myself) will end up making fools of ourselves.

So here I go.

Barron’s covers are by no means the be-all-and-end-all when it comes to contrary sentiment indicators. The paper is designed for finance professionals and the covers are often simply reflections of current thinking. And no one is more aware of the fact that the majority can be on the right side of a trade for way longer than smart-Alecs (like me) ever imagine. So simply pulling out a stack of sell tickets because Barron’s cover appears bullish is probably not a good idea.

But as one of my favourite Austrian portfolio managers, D.Schrottenbaum, rightly noted, “Where do we stand in the cycle? Barron’s cover might help… (personally, a bear throwing a bull off a cliff makes me worry much less than happy people in suits shooting money)”.

Spot on correct. Way back in October 2013, Barron’s cover looked like this:


That bearish cover reflected a sour mood amongst market participants, yet since then, stocks have outperformed diminished expectations. Contrast that to today. Last week’s cover certainly has an optimistic tone to it. For the contrarian, it’s setting off some alarm bells.

Elevated buybacks?

The financial media is filled with pundits warning about the increased buyback activity. Every time you turn on the TV there is some guest worrying about the wisdom of company treasurers buying so much stock at these elevated prices. After all, we all know the terrible timing that most companies have buying back their shares. Cycle after cycle, they always seem to buy way too much at the highs, and far too little at the lows.

Therefore when I see charts illustrating the total amount of equity buybacks this cycle, I get worried.


Really worried…

With Trump’s new corporate tax cut, companies are on track to buy back a record amount of shares.

And this is coming at a time in which companies have been busy writing scads of blue tickets. Ever since 2013, S&P 500 companies have bought over $400 billion of stock back each and every year.

Let’s take away the 2018 estimate and have a look at the past decade of stock buy back data.


Apart from 2007, companies have been hoovering up stocks at a record pace. Eegads. Combined with the Barron’s cover, buyback stats are flashing red.

Comparing apples to apples

But as Lawrence Hamtil reminded his followers the other day, buybacks need to be adjusted for market capitalization. Once I saw his comment, I instantly knew he was correct. As the market keeps rising, the total dollar value of buybacks will also naturally rise. It makes little sense to look at buybacks in absolute terms, but instead we should be focusing on buybacks relative to total market capitalization.

So I set about figuring out what this chart looked like as a percentage of S&P 500 market cap.


Suddenly, it’s not nearly as scary. In fact, 2017 was the second lowest amount of buybacks as a percentage of market capitalization. And even Goldman Sachs’ $650 billion estimate for 2018 (from the graph above titled “Scooping Up Stock”) only equates to 2.25% of total market capitalization at current prices.

Even though I want to join the chorus of pundits worrying about the record amount of buybacks, I can’t bring myself to sing the tune. When I look at the stats, it gives me comfort, not concern. In 2007 company treasurers bought almost 5% of the market cap. We are currently running almost half of that.

Double it and put it on the front cover of Newsweek – then I will be worried.

Speak your mind

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5 thoughts on “One Trader Takes A Closer Look At The Buyback Bonanza

  1. The conclusion does not follow-on from the thread of the article . It is the quantum of $s (esp relative to earnings) that is creating the risk (scariness), not the % of market cap. The low % merely shows what poor value buybacks now represent. And given earnings have not grown in sync with value (i.e. multiples have risen), earnings are less supportive of the buyback funding. The final chart is indicative of risk being further baked into the system and at a faster rate, not that buybacks have become less scary.

    Thank you for the article – a good and timely discussion.

    1. Agree. Enormous amount of capital being thrown at record high multiples. For example google in 2008 was around 350 per share. Google today around 1000 a share. Therefore every dollar of capital being expended by google today for buybacks relative to 2008 buys 70% less of google. When you look at the billions being used today relative to then, we are not looking at a lot of support. This appears almost “exhaustive” in many ways.

  2. While it may seem comforting to compare buyback volume to market cap, companies can’t pay bills with market cap. That’s not their money. Between the debt added to pay for the buybacks and the subsequent removal of equity from firm balance sheets some very awkward capital structures are being created: CP net worth negative for last three years, Kimberly Clark NW negative two of last three years and barely positive in the other year. The list goes on. Many companies have wrecked their capital structures to artificially inflate EPS. The total of dollar buybacks from 2005 thru 2018 (est) is over $6.5 trillion! As investors, are we really expected to believe that this is the best idea these companies have for our money?

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