Pfizer and Verizon Lead the Quarter-over-Quarter Decline
Companies in the S&P 500 spent $134.4 billion on share buybacks during the second quarter. This represented a 6.9% decline in spending from the first quarter. At the sector level, six out of eight sectors saw a sequential (quarter-over-quarter) decrease in share buybacks at the end of Q2 (excluding the Telecom and Utilities sectors, which have each averaged less than $2 billion in quarterly buybacks since 2005). The only sectors to post positive sequential growth were the Consumer Discretionary and Materials sectors.
The largest contributors to this sequential decline in Q2 contained some household names, but also several firms with newly launched share repurchase programs. Pfizer, a consistent participant in buybacks, experienced the largest quarter-over-quarter decline of any S&P 500 company in Q2 in dollar terms (-$6.2 billion). In Q1, the biopharmaceutical company purchased $6.1 billion worth of shares as a part of its shareholder distribution program and its recently launched $5 billion accelerated share repurchase (ASR) program. Contrastingly, the firm repurchased a mere $2.8 million worth of shares in Q2 as CEO Ian Read stated that the firm has already reached its share repurchase target for the year. Verizon was the second largest contributor to the Q2 buyback decline, as it saw a $3.4 billion decrease in buybacks from Q1. Several other companies that experienced a decline of more than $1 billion in quarterly buybacks were: United Technologies (-$2.6 billion), Gilead Sciences (-$2.3 billion), Illinois Tool Works (-$1.4 billion), Johnson & Johnson (-$1.3 billion), Abbott Laboratories (-$1.3 billion), eBay (-$1.2 billion), and Keurig Green Mountain (-$1 billion).
Another factor playing into the sequential decline of buybacks was lower buyback participation overall. The number of companies repurchasing shares dropped from 390 in Q1 to 378 in Q2. The average number of companies participating in share buybacks since the recession ended in July 2009 has been 357.
Sector Trends: Information Technology Tops Spending, Financials, and Industrials Lead Growth
The Information Technology sector spent $35.9 billion on share buybacks in Q2, which was more than all other groups. This marked the twelfth consecutive quarter that the Information Technology sector topped all sectors in buybacks. Four out of the top 10 companies by quarterly dollar-value buybacks were in this sector, with Apple leading the way. On April 27, 2015, Apple announced that it had expanded its capital return program to $200 billion, which included an increase in its share repurchase authorization from $90 billion to $140 billion. Apple’s dollar-value buybacks in Q2 amounted to $10 billion, which represented an 18.2% increase from its Q1 level. However, this amount was still well below the company’s largest quarterly repurchase value in Q1 2014 ($18.6 billion).
The Financials sector led all of the major buyback sectors (excluding the Telecom and Utilities sectors, which have each averaged less than $2 billion in quarterly buybacks since 2005) in terms of year-over-year growth (+29.8%). The Industrials sector came in second with a growth rate of 17.1%. The Financials, Industrials, and Consumer Discretionary sectors were the only major buyback sectors to post double digit year-over-year growth in Q2.
American International Group and Citigroup were the two drivers of growth in the Financials sector. Dollar value buybacks for AIG amounted to $2.3 billion in Q2, which was a $2.1 billion increase from its total in the year ago quarter. In Q2 2015, the insurer declared an increase to its dividend and authorized the repurchase of an additional $5 billion worth of shares, bringing the total remaining share repurchase authorization to $6.3 billion. In early March, Citigroup received approval from the Federal Reserve, as a part of the 2015 Comprehensive Capital Analysis and Review (CCAR), to repurchase up to $7.8 billion in the next five quarters starting in Q2 2015. The bank repurchased $1.6 billion worth of shares in Q2, which was a $1.3 billion increase from its Q2 2014 total. Bank of America and Bank of New York Mellon were two other notable contributors to year-over-year buyback growth in Q2 (+$539.9 million and +$403.5 million).
In the Industrials sector, Lockheed Martin and American Airlines contributed the most to the year-over-year growth in buybacks (+$813.3 million and $752.7 million). Other notables within the Industrials sector were Delta Airlines (+$697.5 million), UPS (+$609.5 million), and Boeing (+$448.8million).
Spending on Buybacks Exceeds Free Cash Flow for first time since October 2009
Although the aggregate dollar-value of share buybacks declined sequentially in the second quarter on a TTM basis, companies in the S&P 500 still spent more on buybacks than they generated in free cash flow. Free cash flow is defined as cash from operating activities minus capital expenditures from fixed assets and cash dividends paid. The aggregate Buybacks to Free Cash Flow ratio for the S&P 500 exceeded 100% for the first time since October 2009. The ratio hit 108% on a TTM basis at the end of Q2, which represented a 12.9% increase quarter-over-quarter and a 42% increase year-over-year. The 10-year median ratio was 72.2%. At the sector level, four out of the 10 GICS sectors had a ratio greater than 100% at the end of Q2 (Consumer Discretionary, Consumer Staples, Industrials, and Materials). This is not necessarily a surprise, however, because the 10-year median ratio for each of these sectors is well above 100%, with the exception of Industrials (81.2%).
What is driving this ratio to such high levels? As mentioned above, the TTM dollar-value share repurchases in Q2 amounted to $555.5 billion, which was a 1.3% increase year-over-year. This partly contributed to the higher ratio, but the main driver was free cash flow. TTM free cash flow at the end of Q2 totaled $514.4 billion, which represented a 28.6% decline year-over-year. The aggregate FCF for Q2 was the lowest level for the S&P 500 since Q3 2009, when FCF amounted to $140.2 billion. The sectors leading the decline in free cash flow were Energy and Financials. Financials saw a 50.2% decline in FCF year-over- year, with State Street Corporation heavily contributing to this decline.
State Street reported cash flow from operations of -$5.1 billion in the TTM ending Q2 2015 after reporting a $907 million inflow in the TTM from the year-ago quarter. The Energy sector, which typically has high levels of fixed capital expenditures, saw free cash outflows totaling -$65 billion in the TTM ending Q2. Free cash outflows amounted to -$7.1 billion in the TTM ending Q2 2014. Southwestern Energy was another large contributor, as it increased its fixed capital expenditures by almost 250%, leaving it with free cash outflows of -$5.7 billion in in the TTM ending Q2. The company reported free cash inflows of $4 billion in the TTM from the year-ago quarter. Due to decreases in free cash flow, buyback spending for the S&P 500 is now 1.08 times TTM free cash flow, which has surpassed the 10-year average of 1.05 times free cash flow.
Buyback Yield Hits Lowest Level since April 2011
The trailing 12 months' shares repurchased in the S&P 500 represented 2.8% of the aggregate shares outstanding in the index. This represented the smallest buyback yield since April 2011, when the ratio was 2.7%. The second quarter was also the third consecutive quarter that the S&P 500 buyback yield fell below the 10-year average of 3.1%.
Relative to shares outstanding, the Information Technology sector was the most active buyer of its own shares in Q2. The sector’s trailing 12 month share repurchases amounted to 4.3% of the sector’s aggregate shares outstanding over the period, which marked the seventh consecutive quarter that the Information Technology sector had the largest buyback yield. The two companies with the highest buyback yields were also in the Information Technology sector (Juniper Networks and Motorola Solutions). Juniper Networks repurchased more than 27% of their shares outstanding over the TTM and Motorola Solutions repurchased almost 23% of their shares outstanding.
75% of S&P 500 Companies Took Part in both Dividends and Buybacks
Share repurchase programs have become a very popular way of returning capital to shareholders. In general, the number of companies participating in share repurchases has increased since the U.S. recession.
The number of companies in the S&P 500 taking part in both dividends and buybacks over the trailing twelve month period reached 374 (75% of the index), which was the second highest number in the index since at least 2005. Meanwhile, the number of companies that bought back shares and did not pay a dividend reached 65 at the end of July, which was slightly above the average for both 2014 and 2015 (63 companies). The count of companies that did not take part in buybacks or dividends remained at a low level (20 companies), right near the average for the past three years.
Performance Trends in Buyback Yield
Companies in the S&P 500 with no share buybacks have outperformed all quartiles of buyback yield since March 2014 on a market cap weighted cumulative return basis relative to the S&P 500 Total Return Index. This group has also outperformed the index since June 2012. As shown below, the “No Buybacks” group has significantly outperformed the benchmark return in recent months. Major contributors to this positive performance have been stocks like Google, Amazon, and Netflix, which were each up over 20% in July.
It is important to note that companies that repurchased shares have generally outperformed both the S&P 500 Total Return Index and companies that did not make share repurchases on an equal-weighted basis.
On an equal-weighted basis, the first quartile of stocks has averaged a monthly return of 0.73% since 2005, the highest of any other group. Contrastingly, the group of companies not making share repurchases has averaged a monthly return of 0.57% on an equal weighted basis, which is the lowest of any other group.
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