Buybacks: Who doesn’t love them?

Buybacks are shareholder capitalism’s crowning achievement. It’s stockowners who matter in America. Other stakeholders have to fight, shout and strike for their fair share, while management proactively finds ways to skim as much off the top for investors as possible. When the cost of debt is low, management will happily leverage the company to buy back shares.

It’s a great system we run. You can tell by the picket lines.

Unfortunately, financing costs have risen lately and credit conditions are tighter, which some suggest might keep buybacks under pressure. It’s tragic, I know.

As BofA’s Savita Subramanian wrote, in an October 22 note, “buybacks are more at risk from tighter credit conditions and increased cost of capital than capex.”

Buybacks, she went on, “were a post-GFC phenomenon, with companies taking advantage of cheap financing costs to repurchase their own stocks.” You might be too young to remember a time before the financial crisis, but pre-GFC, buybacks showed “no net benefits to earnings,” Subramanian noted. That changed in the era of hyper-financial engineering.

The figure on the left, above, suggests buybacks could be subdued looking ahead. “The spread between earnings yield and corporate bond yields has been a strong leading indicator,” Subramanian remarked.

The figure on the right is self-explanatory. Slower debt issuance likewise points to “tepid” (as BofA put it) buybacks.

Repurchases plunged 26% in Q2, on BofA’s calculations. A couple of weeks into reporting season, the YoY decline for Q3 stands at -3%.

As detailed here a few days ago, Goldman expects buybacks to grow just 4% in 2024 after falling 15% this year. Still, net corporate equity demand will be $550 billion next year, according the bank’s David Kostin. That should be enough to make the corporate bid the largest source of demand. Again.

Read more: Who’ll Buy Stocks Next Year?