So far this earnings season, the biggest companies in the U.S. are spending less on stock buybacks and more on investments in their businesses — a shift in thinking from the last few years that could, in the end, drive even more shareholder value. Companies in the S & P 500 spent 36% less on repurchases in the second quarter of 2023 than a year ago, Bank of America strategists wrote in a note to clients last week. The BofA analysis is based on data from firms that have reported financial results through July 28. That 36% decline is even steeper than the 27% drop observed in the first quarter, according to BofA. The analysts attributed the decline, in part, to tighter credit conditions. Cheap debt following the 2008 financial crisis helped drive buyback activity to record levels in recent years. Meanwhile, S & P 500 companies are spending more and more on capital expenditures (CapEx). They are on track to see their ninth straight quarter of investments increases, BofA said. “We believe the re-investment cycle will ultimately lead to increased productivity, which will be the main driver of earnings growth going forward, [versus] the last decade’s financially-engineered growth, in our view,” wrote BofA strategists led by Savita Subramanian. Buybacks are sometimes labeled as “financially-engineered growth” — but as shareholders, we like when companies choose to buy their shares because they perceive them as a bargain. Certainly, some companies execute wise buybacks, while others are not as ideal. It’s our job to do the homework so we can tell the difference. However, if companies view their extra cash as better spent going back into their businesses, we like that, too, because better businesses mean better fundamentals. As stock investors, we believe that stock prices eventually follow fundamentals. An analysis focused specifically on 21 Club holdings that reported earnings through Tuesday morning reveals similar trends. Our look — based on data from FactSet — excluded GE Healthcare (GEHC), because it’s only been an independent publicly traded firm for two quarters. Only three Club holdings spent more money on buybacks in their most recent quarters than they did in the same period in 2022: Wells Fargo (WFC), Caterpillar (CAT) and Humana (HUM). And two of those, Wells Fargo and Humana, made the cut because they weren’t buying back stock in a meaningful way a year ago. Wells Fargo spent about $4 billion in Q2, compared with a mere $4 million a year ago. Humana repurchased $529 million worth of common stock in the second quarter, after spending only $4 million in the year-ago period. However, Caterpillar spent $1.43 billion on buybacks, which is up a robust 29% from $1.1 billion in Q2 2022. A similarly small list is revealed when we take a broader look at how second-quarter buyback activity stacks up compared with the average during the four reporting periods preceding it. Under those parameters, Halliburton (HAL) joins Wells Fargo, Caterpillar, and Humana. Halliburton bought back $248 million worth of stock in Q2 2023, compared with an average of just $87.5 million in the four prior periods (the first quarter of 2023, and the second, third and fourth quarters of 2022.) On the other hand, a larger portion of Club holdings reported year-over-year increases in capital expenditures, mirroring Bank of America’s findings. So far, 14 of the 21 portfolio companies included in our analysis spent more on CapEx in Q2 than they did in the year-ago period. Here’s the list looking at year over year. Alphabet (GOOGL) Microsoft (MSFT) Caterpillar Morgan Stanley (MS) Linde (LIN) Pioneer Natural Resources (PXD) Honeywell (HON) Halliburton Emerson Electric (EMR) Danaher (DHR) Ford Motor (F) Procter & Gamble (PG) Eli Lilly (LLY) Coterra Energy (CTRA) The list changes a bit when examining CapEx in the most recent quarter versus an average of the four preceding periods. Under those conditions, Alphabet, Emerson and P & G would drop off — meaning they reported lower CapEx in Q2 than their average over in Q1 and the final three quarters of 2022 — and Humana would be added because its second-quarter CapEx exceeded the average of the four preceding quarters. What it all means As we’ve indicated many times before , we are generally supportive of share repurchases to return capital to investors. When buybacks reduce a company’s outstanding share count, this means remaining shareholders now own a larger percentage of a firm without needing to spend more money on additional stock. It’s also a more tax-efficient way to return cash to shareholders than dividends. However, we recognize companies may ease the pace of buybacks for a couple of reasons, including higher borrowing costs, as Bank of America called out. Additionally, for some companies, their buyback programs are a function of their earnings, so it stands to reason that if profits are down on an annual basis, share repurchases are likely to be, too. There may also be times when management teams determine it’s prudent to keep more cash on hand, perhaps due to concerns about an impending recession, or because that money can generate investment income in interest-yielding securities. Of course, companies also must consider their spending on buybacks versus investments back in the business in order to support growth, such as new manufacturing equipment or data centers. It’s a balancing act that management teams are constantly debating , with company-specific considerations ideally guiding those decisions. At this point, as Bank of America’s analysis and our own shows capital expenditures appear to have the upper hand lately. But keep in mind: It’s hard to make blanket statements about the direction of capital expenditures. For some companies, such as Microsoft (MSFT), it’s understandable that the need to build out artificial intelligence-related infrastructure will lead to higher CapEx. For other companies, investor demands to control spending are more important and wins the day. That’s the case at Meta Platforms (META), which reported second-quarter CapEx of $6.22 billion, down from $7.57 billion in the year-ago period. Bottom line For us, if companies are buying back stock for the right reasons then we’re happy for the benefit of increased ownership that a reduction of outstanding shares brings. But less spending on buybacks is not necessarily something to worry about. Because if that extra cash is being reinvested into companies’ infrastructure, then the hope would be that we’d benefit as shareholders from higher stock prices that accompany better businesses. If a company is spending more on CapEx versus buybacks than it might be because they think they can generate a better return investing in projects than simply buying back stock. Over the long term, that’s what generates more shareholder value. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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So far this earnings season, the biggest companies in the U.S. are spending less on stock buybacks and more on investments in their businesses — a shift in thinking from the last few years that could, in the end, drive even more shareholder value.
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