Buybacks are back, in a big way.
Teeming with cash from soaring profit and tax reform, U.S. corporations have started on a stock-buying spree, devouring their own shares at a record pace.
There are early indications of a rise in domestic buybacks, as well, although Canadian data is not as readily available.
"It's quite likely this is a marketwide trend in Canada," said Stephen Lingard, senior vice-president at Franklin Templeton Investments Canada. "With all of this uncertainty on trade policy, maybe this is the easiest way to put cash to work and support share prices."
For a stock market grappling with new economic and political risks and struggling to move on from the recent correction, a sustained rise in corporate share repurchases could provide a crucial support for equity prices.
The incentives that tend to fuel buyback binges are all there: an abundance of cash, considerable market and economic uncertainty and a recent dip in stock prices making valuations more attractive.
In February alone, U.S. corporations "smashed" the previous monthly record in announcing US$151-billion of new share repurchases, according to California-based firm TrimTabs, which tracks corporate buybacks.
Total buybacks for 2018 could easily top US$800-billion, JP Morgan analysts said in a note to clients on Friday. In Canada, sizable buyback programs have recently been announced by some of the big banks, as well as some large oil and gas producers.
It all represents a resounding comeback of the buyback boom, which up until this winter, was fading.
Companies will often buy back their own stock as a way to return excess cash to shareholders when the options for investing in long-term growth may not be as attractive.
This was the case in the years after the global financial crisis and ensuing recession, as the tenuous economic recovery, combined with steadily climbing profits, had corporate managers both cautious and flush with cash.
U.S. buybacks climbed steadily from 2009 to 2015, as corporate buyers proved to be a key source of demand for equities, reliably outpacing money flowing into stock funds.
Total U.S. buybacks since 2010 have exceeded US$3.5-trillion. Combined with US$2-trillion in dividends, more money has been distributed to shareholders than has been pumped into the system by the U.S. Federal Reserve's rounds of quantitative easing.
But the buyback boom appeared to hit its peak in 2015, after which the crash in crude oil prices, combined with a resurgent U.S. dollar, weighed on profitability.
"Our view coming into the year was that we would see buybacks continue to slow a bit," Mr. Lingard said. With U.S. stocks trading at high valuations compared with historical averages, buybacks were increasingly questioned as a wise use of capital.
U.S. tax reform seemed to change all of that. In December, legislation cut the corporate tax rate to 21 per cent from 35 per cent, and provided an incentive for companies to repatriate more than $2-trillion in cash held overseas.
Those measures combined could contribute US$300-billion to this year's buyback total, according to JP Morgan estimates.
On top of that, the U.S. corporate sector put up a huge fourth-quarter performance. More than three-quarters of the companies in the S&P 500 index beat Wall Street's estimates, with total profits rising by 15 per cent over last year, according to Thomson Reuters data.
"The blowout earnings season gives them options," Mr. Lingard said. Many companies don't necessarily have to choose between investing for the future and rewarding investors now. "The size of the windfall means maybe they can do both," he said.
Some Canadian companies are able to avoid tough choices these days, as well. While there is no comparable Canadian corporate tax bonanza, domestic earnings trends are just as strong. Fourth-quarter profit for companies in the S&P/TSX Composite Index are on track for a 21-per-cent gain over last year.
"Share buybacks continue to be a useful tool to deploy excess capital after fully investing in our businesses," Rod Bolger, chief financial officer of Royal Bank of Canada, said on a conference call with investors last week.
RBC said it would repurchase another 30 million of its own shares, after spending $920-million buying back the same number in its fiscal first quarter.
Meanwhile, Bank of Montreal said it would be buying back and cancelling 20 million of its shares.
Aside from financials, the conditions also seem favourable for a spike in buybacks in the Canadian energy sector. Last month, Suncor Energy Inc.'s announced a buyback of $2-billion beginning in May, when its previous repurchase program of the same value expires.
"There's a lot of pressure on management teams to be more shareholder friendly," said Craig Bethune, portfolio manager and co-lead of the global natural resources equity team at Manulife Asset Management. "People don't want to see companies plowing that money back into pure growth."