Last weekend, I talked a bit more about equity supply/demand dynamics.
The overarching point was to say that between, on one hand, a precipitous decline in buybacks, and, on the other, IPOs and secondaries, the US equity market was poised to expand for the first time in more than a decade.
Specifically, 2020 marks the first time since 2009 that the S&P 1500’s divisor is up for the year, on Bloomberg’s data.
Read more: For The First Time In A Decade, The US Stock Market Is Expanding
All else equal, more supply and less corporate demand in the form of buybacks “should” have been bearish. After all, corporates have been the largest source of US equity demand for years.
But, this ostensible headwind was insufficient to impede equities on the road to new highs. And those new highs simply emboldened more equity issuance. Airbnb’s ridiculous first day performance this week was indicative of the mood.
As over the top (figuratively and literally) as things may seem right now, it’s worth at least considering that if buyback activity picks up in 2021, that’s just an extra source of demand.
If things are already going well, it’ll be another bullish catalyst — “a cherry on top,” so to speak. If, for whatever reason, things aren’t going well, the return of buyback “plunge protection” would help limit the downside, (with the caveat that the factors which might derail markets in 2021 would likely also make the C-suite reluctant to part with cash).
“Buybacks continue to be constrained mostly by Financials as well as by Cyclicals,” JPMorgan wrote, in their year-ahead outlook for equities. “Based on Q3’s annualized figure, US corporates repurchased shares at an annual rate of ~$350 billion, which is down from 2019’s rate of ~$630 billion,” the bank went on to say, adding that they “expect S&P 500 companies to increase net buybacks next year to an annual pace of ~$450 billion.”
Goldman is somewhat cautious. “After representing the largest source of demand for US equities for a decade, corporate buybacks will likely remain depressed next year relative to recent history,” the bank said last month.
They see net demand from corporates doubling from $150 billion in 2020 to $300 billion in 2021. That figure was $568 billion in 2019 and $692 billion in 2018, following the tax cuts.
In a note dated Thursday, BofA’s Michael Hartnett underscored the anomalous nature (by comparison to recent history, anyway) of 2020. This is “the first year since 2009 that US IPO and secondary issuance is higher than S&P 500 buybacks,” he wrote.
Just another in the long list of notable statistics from what might fairly be described as one of the most remarkable years that most living humans have ever witnessed.
Generically, US banks have excess capital, excess loss reserves to be released, will see better net interest margins from a steeper yield curve, will continue cutting costs, will see revolving credit repaid, will probably not see exuberant new credit demand in 2021, and logically should be permitted to resume share repurchases in 2021.
The regionals might chose to merge, but the bulges won’t be allowed to and there are only so many fintechs and wealth managers they can buy. Political considerations likely mean they may gradually ease into buybacks, but I don’t see Powell or Yellen having the same buyback-hostile attitude as, say, Warren. I think we’ll see US banks’ buybacks ramp up nicely in 2H21.
Going overseas, there are some financials that have been prohibited from both making buybacks and paying dividends. Look over the Atlantic. Their upside is even more pronounced, both already realized and to come.
I am not sure that one should look for cyclicals to ramp buybacks in 2021 in a major way. Investors will probably demand their excess cash flow go to debt reduction. That’ll be a very stock specific call.
No mention of the legislative risk? I recall that even President Trump once growled about the need to make buy-backs less attractive versus capex and dividends. There are others in the populist side of the GOP who support the idea if it is couched as a “pro-growth and hiring” measure. For progressives it’s attractive as an income inequality issue. (Along with chopping off the ridiculous carried interest tax subsidy.)
So I expect that buy-backs will face some unwelcome scrutiny in Washington DC next year.
Of course, in this kind of market that might be construed as bullish! It would mean that companies would rush to get massive buy-backs done before tax changes rendered them less-attractive!
Longer term, wait until the ESG crowd puts buy-backs into their “bad governance” buckets. Rightly so, in my most humble opinion. Imagine the dilemmas in the board rooms as corporate execs weigh the personal benefits from buy-backs against the reputational cost to their companies.
If corporate behavior after the last two tax holidays for profits “stranded” offshore, I guess we can guess which will they will opt for.
US banks will get excess cash back to investors one way or another. It could be buybacks, special dividends, or regular dividends.
The smaller banks, not subject to the Fed’s prohibition or activist scrutiny, are already increasing their buyback plans. https://www.americanbanker.com/news/community-banks-poised-to-resume-stock-buybacks
Expanding on that, I don’t think buybacks are this huge issue some make it out to be. That money will get to shareholders in some way, shape or form–dividends or even some new financial product. It’s certainly NOT going to be earmarked to labor.
Has not this year shown consistent outflows from equities in favour of other asset classes? Yet, that did not inhibit the market from going to record valuations. It is time to move on.