1. Market Perspective – May 2018
Experience Insight Impact
Overview: With current U.S. tax policy helping to steer large amounts of cash back onshore for
domestic multi-national companies, many investors are asking how this cash will be spent. This
month, within a historical framework, we explore the expectations for share repurchases as a
portion of this capital utilization.
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Source: Google Images
2. What Is A Share Repurchase?
Experience Insight Impact 2
A share repurchase program (aka a “share buyback” or simply “buyback”) is when a company purchases shares
of their stock (typically in the open markets, although there are variations) in order to reduce the total number
of shares outstanding. There are several reasons why this is typically deemed to be positive by market
participants. Some of the key reasons are:
• Undervalued: Companies tend to use buybacks to deploy capital when
they view their stock as being undervalued.
• Cash Flow Expectations: Typically a company will deliver cash back to
shareholders via buybacks (or dividends) when cash flows are strong.
• Lowering The Supply: Reducing the “float” by retiring outstanding shares
could drive the stock higher by reducing the supply of available shares.
• Growing The “Per Share” Metric: By reducing the outstanding share
count, and assuming idle cash is not earning a compelling interest rate,
the per share calculation will be driven up. If the E (~earnings) in Earnings
Per Share (“EPS”) stays consistent, and the share count is reduced, the
overall EPS number will likely rise.
• Distributing Cash Back: Share repurchases, unlike dividends, do not have
immediate tax costs, providing a more efficient distribution to
shareholders.
Source: Google Images
3. Where Is Capital Being Deployed?
Experience Insight Impact 3
While capital use should rise dramatically following several lackluster years (and meaningful changes to the tax
code), buybacks are expected to experience the fastest growth in quite some time at 23%. Some analysts will
combine dividends and buybacks to provide a “shareholder yield” to investors approaching 5% for the S&P 500.
4. Record Share Repurchases Expected
Experience Insight Impact 4
Source: Barrons; S&P Dow Jones Indices; Goldman Sachs
Share repurchases are expected to reach all time highs in 2018, exceeding the prior peak in 2007.
5. Share Repurchases Don’t Always Result In Higher Stock Prices
Experience Insight Impact 5
Source: Bloomberg, Goldman Sachs Asset Management
• As the chart on the right suggests, share
repurchases do not always result in a higher
stock price.
• Examples, such as General Electric and IBM,
further exemplify that buybacks, while
generally positive, are typically not solely
responsible for share performance.
Companies must be careful not to “starve”
operations of growth capital. Both
companies had large buybacks, but the
stocks performed poorly as the share
repurchases could not hide lackluster
growth.
• Strong fundamentals and strong cash flow
must accompany buybacks to be successful.
Apple would be an example of such a
situation. The company has repurchased
more than $200 billion of its own stock since
2012, while emphasizing that it is plowing
$30 billion into domestic capital spending in
the upcoming years.
6. Market Perspective – May 2018
Experience Insight Impact
Conclusion: In general, well-executed share repurchases can serve investor’s interests over time.
Currently, with U.S. tax reform as one driver, we are seeing accelerations of such programs in a
wide variety of industries (although there is some concentration amongst the mega-cap, multi-
national companies). Repurchasing shares of stock by any company must be accompanied and
viewed alongside fundamentals to provide investors with insight into the future. More broadly,
we look to utilize this indicator as one of many tools to evaluate economic conditions.
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Source: Google Images
7. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
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