The recent rise in interest rates may cause nervousness among some investors, but it is unlikely to hinder purchases of the largest whales in the stock market: the corporations themselves.
US companies’ inflated cash piles and pink earnings prospects raise expectations for more executives to follow in the footsteps of Warren Buffett and unleash a series of share buybacks, adding a layer of support to the stock market after buybacks fell last year. At the very least, the acquisitions could help offset the growth in the stock offer this year through a parade of publicly traded special procurement companies, and record number of secondary bids.
“When you see the cash flow accelerate, you’ll see redemptions soon after,” said Gina Martin Adams, chief stock strategist for Bloomberg Intelligence. “There’s an extraordinary amount of money sitting there, nowhere.”
S&P 500 companies entered this quarter with more than $ 2.2 trillion in cash, and Wall Street is projecting a 24% increase in revenue in 2021, according to data compiled by Bloomberg.
Redemptions between benchmark companies have already shown signs of recovery. Redemptions rose to $ 120 billion in the last three months of 2020, up 28 percent from the previous quarter, according to data compiled by Bloomberg. For the first time since the Covid-19 crisis, more than half of the index bought shares. However, redemption activity remains well below the $ 197.7 billion pre-pandemic levels recorded in the first three months of 2020.
If the redemptions return to average levels in the last five years before 2020, the redemptions will expand by almost 50% in 2021, according to Adams. In a survey conducted by RBC Capital in mid-March, about 60% of analysts said redemptions are a priority for management teams that want to implement cash. Only dividends received a score higher than 76%, said Lori Calvasina, head of US action strategy, in a note to customers.
“US equities will be strong in 2021, supported by a recovery in redemptions, solid dividends, a recovery in margins and strong fundamental economic support,” she wrote, noting that costly valuations are likely to limit gains.
Dumb effect
Not everyone is optimistic about the redemption effect. While redemption activity is poised to grow this year, it is unlikely to reach pre-pandemic levels due to high earnings multiples and declining investor enthusiasm for redemptions, according to Bank of America Corp. stock strategist. Jill Carey Hall. Corporate shopping growth will also be offset by a boom in companies raising money by selling shares, Hall said in an interview.
The bank’s corporate customers repurchased $ 3.7 billion worth of shares last week, the second-largest total, Hall and her colleague Savita Subramanian wrote in a research note. Procurement was driven by technology companies, but sectors such as healthcare, discretionary and financial consumers accelerated procurement.
Technology companies, many of which have seen business growth in the past year, have remained steadfast in their buying from other industries. Technology accounted for 44% of total S&P 500 redemptions in the fourth quarter, up from 27% in the same period last year. Sectors that drastically reduce redemption activity, such as discretionary consumers and industry, are poised to capture more shares as earnings improve, said Adams, Bloomberg Intelligence.
Top Buyer
By far the largest buyer was Apple Inc. Technology giant repurchased $ 24.8 billion worth of shares last quarter, more than the next four largest combined buyers, according to Date Bloomberg. The iPhone maker could set the tone next month, when it usually updates investors on its capital return plans along with second-quarter tax gains.
Of course, some investors frown at companies that work in cash to buy their own shares, rather than investing in things like acquisitions or research and development. However, even Buffett is a fan these days. The head of Berkshire Hathaway Inc., which in the past has criticized the redemptions himself, spent more than $ 24.7 billion of his company’s cash on redemptions in 2020 and praised Apple’s purchase to increase Berkshire’s stake in the company.
Berkshire Hathaway will continue to buy its own shares in 2021 and is likely to buy more, the billionaire investor wrote in its annual publication shareholder letter last month.
“The process gives investors a simple way to own a growing share of exceptional business,” Buffett said before quoting Mae West: “Too much good can be … wonderful.”
– With the assistance of Tom Contiliano and Elena Popina