Goldman Warns of a ‘Significant’ Adverse Impact on Stocks as 2020 Buybacks Are Cut in Half
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Goldman’s buyback desk warned that nearly 50 US companies have suspended existing share repurchase authorizations, representing $190 billion of buybacks, or nearly 25% of the 2019 total. Reduced cash flows and select restrictions mandated as part of the Phase 3 fiscal legislation suggest more suspensions are likely. Buybacks have represented the single largest source of US equity demand in each of the last several years. Higher volatility and lower equity valuations are among the likely consequences of reduced buybacks.
In 2020, Goldman forecasts that S&P 500 dividends will fall by 25% and buybacks will plummet by 50% compared with 2019 levels.
The irony is that Goldman should not have been repurchasing their stock at the all-time S&P500 highs, yet that’s precisely what they did. In fact, the main reason stocks were at all-time highs when virtually every investor class was selling was because of stock buybacks!
Reduced buyback spending means less downside support for equity prices, since fewer firms will repurchase shares if their stock prices fall. During the past 25 years, the 20th percentile return for stocks in the S&P 500 has averaged -27% annualized during buyback blackout periods compared with -16% when companies can freely repurchase their shares. Fewer buybacks also means slower EPS growth. Since 2008, the gap between EPS growth and earnings growth for the aggregate S&P 500 index averaged 1-2 pp annually.
The Fed may be on its way to nationalizing the entire market, but in its last gasps of normalcy, the market is finally exhibiting the kind of efficiency that was missing for much of the past decade, and for once is doing the right thing in rewarding prudent corporate behaviour and debt repayment while punishing those companies that hit all-time highs only because their management teams knew nothing more than ‘wave it in.’
It’s doubtful whether the Fed will allow this kind of rational behaviour to last too long before it takes over the stock market, at which point capitalism will officially be dead.