Banking on Buybacks in 2022

As recent data points and forecasts suggest, 2022 should prove to be another banner year of global dividend growth, but as advisors know, dividends aren't the only game in town when it comes to shareholder rewards.

Buybacks should not be overlooked, but there are nuances pertaining to share repurchase programs that many clients aren't aware of, confirming that this an excellent conversation starter with clients. Notably, many clients – perhaps due to their own cognitive bias – are partial to dividends. They like the cash delivered by dividends and that's particularly true at a time when inflation is high and interest rates are low.

Second, many clients aren't aware of the benefits of buyback programs. Fortunately, these aren't hard concepts to convey. When a company reduces its shares outstanding count, its earnings per share (EPS) increase. Additionally, buybacks are more tax-efficient. Clients pay taxes on dividends received. That's not the case with share repurchase programs.

Another point to remember is that share repurchase schemes offer companies flexibility. In many cases, dividends that aren't variable amount to fixed obligations for corporations and many are loathe to cut or suspend those payouts unless it's an extraordinary circumstance. Think the global financial crisis or the coronavirus bear market of 2020. With a buyback plan, a company is under no obligation to repurchase the announced dollar amount and it can buy those shares back on the open market at its leisure.

Expect Big Buybacks This Year

As was the case with dividends, S&P 500 buybacks ascended to an all-time high last year. Advisors might want to convey to clients more of the same is on the way in 2022.

“We are watching the $7tn in cash that US corporates have accumulated heading into 2022. If companies deploy their cash (without any increase in leverage) in historically typical ways, dividends, buybacks, capex and acquisitions could rise $300bn this year (+16%) to a record $2.1tn,” according to Bank of America Global Research.

It's not a stretch to say buybacks will be big this year because, as Bank of America notes, since 2011 through the third quarter of 2021, S&P 500 net income totaled $10.3 trillion. Of that figure, $6.1 trillion was allocated to buybacks while $4.2 trillion was directed to dividends. Since 2010, the ratio of buybacks to dividends favors the former.

“The ratio of total quarterly buybacks-to-dividends has rebounded to its 10-year average after falling to new post-GFC lows amid the Covid crash. If dividends grow by 13% this year and the ratio stays near its long-term average, we could see $784bn in buybacks, the second highest since 1998,” adds Bank of America.

Familiar Highlights Validity of Buybacks

Sometimes, it's best to illustrate a point to clients with a hard and fast that's likely to resonate with them. Regarding buybacks, there's no better example than Apple (NASDAQ:AAPL). Including $85.5 billion last year, the iPhone maker spent a staggering $467 billion on buybacks over the prior decade.

Of course, there are plenty of other reasons why Apple recently became the first company to enter the $3 trillion club, but there's no denying buybacks helped it get there. And there's no denying buybacks can drive out-performance.

“The S&P 500 Buyback index has outperformed the S&P 500 by 3.7% since 1994 on a monthly total return basis. Our equity team’s Buyback factor has also tended to perform well in periods of Fed tightening with a median total return of 6.7% since 1986,” notes Bank of America.