Companies belonging to the S&P 500 are easing off buyback purchases. This oddity offers a few reasons for concern, though positive outcomes are not unlikely either. So, what is going on with S&P 500 stocks and what can investors expect from the phenomenon? Many investors keep large positions in SPDR S&P 500 ETF Trust (NYSEARCA:SPY) as part of their portfolio, making this a big moment for traders.
The initial three-month period of 2016 saw $161.4 billion in stock repurchases. That figure dropped by nearly $30 billion to $133.3 billion this year.
Indeed, members of the S&P 500 are seen repurchasing a lot fewer of their own shares. The event offers a mixed bag of goodies, and not-so-goodies, for company shareholders. There was a more than 17 percent drop in share buybacks in the first quarter of this year. That is compared to same period last year, according to an S&P Global report.
Analyst Howard Silverblatt points out that, as share values went on the rise, the money spent on stock buybacks shrunk. This means companies are dedicating less funds to repurchases, which can effect the growth of earnings per share.
This appears entirely intentional too, for those who might think otherwise. In the first quarter, less money spent on buybacks resulted in a record level of cash left on company balance sheets.
The effects for investors are as follows:
Good effects of less S&P 500 buybacks
There may be more to this wave of self-bullishness than meets the eye. Sure, it might be an innocent occurrence too, for the most part. However, a few experts believe that the previous record-high level of share repurchases worked to artificially inflate stock values. In that regard, a drop of 17.5 percent is a positive sign. Couple that with an 8 percent increase in SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and investors see more genuine value for their share purchases.
Valuation is most certainly a major player, though. This is the opinion of analysts like Dennis Dick, who says less buybacks can be a sign of good company performance too. Companies are likely holding on to cash or simply looking for better ways to put that cash to use.
Corporations can up dividends, grow operations or possibly boost activity related to M&A with their extra cash.
Bad effects of less S&P 500 buybacks
Counting the negatives, companies that are easing off share buybacks might be trying to avoid their overvalued shares. The unwillingness of companies to give into share buybacks adds worth to bullish concerns related to them.
Whatever is causing this slump, there are some sectors of the S&P 500 that are more bullish than other. The Financial Sector, for instance, bumped up share buybacks to $29.5 billion in the first quarter. That is a rise of 10.2 percent. On the other side of that spectrum, the initial quarter saw Health Care drop its stock repurchases by 6.5 percent. Health Care buybacks added up to $27 billion in total. These moves could be noise in the signal, but we’ll have to wait for more data to figure that out.
The two greatest buyback companies in Q1 were Apple Inc and Pfizer Inc. Although Apple dropped repurchases by more than 30 percent, it still got $7.2 billion’s worth of its own shares. Pfizer held its ground at $5 billion. On Thursday the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) was mostly flat, finishing the day down by 0.05 percent.