Corporate Buybacks Gain Steam With Banks Poised to Boost Buying

(Bloomberg) -- High stock price valuations may be giving some investors pause, but it hasn't stopped U.S. corporations from plowing even more cash into their shares.

Morgan Stanley and Wells Fargo Inc. are among the nation's biggest lenders that signaled this week they're stepping up repurchases and raising dividends after passing Federal Reserve stress tests with flying colors.

Banks are joining the party after buybacks rose sharply in the first three months of the year, capping several quarters of gains following a pandemic-related dip in 2020. The moves bode well for stocks since buybacks are a direct way to boost share prices and companies are flush with cash as the U.S. economy rebounds from a year of lockdowns.

“We think that buybacks will exceed all-time highs,” said Scott Ladner, chief investment officer at Horizon Investments LLC.

In the first three months of 2021, companies in the S&P 500 spent $171.5 billion on stock repurchases, according to data compiled by Bloomberg Intelligence. While still below pre-pandemic levels, the buying was a big jump from the last three months of 2020, when companies spent more than $120 billion on their own stocks.

Buybacks have been on an upswing since the second quarter of 2020, when the Covid-19 crisis caused companies to drastically cut back on repurchases. Rising cash balances and improving earnings have inspired them to plow some of that capital back into their stocks.

So far, tech companies have been the biggest buyers. In the first three months of the year, the information technology sector accounted for nearly a third of buybacks, led by Apple Inc. But now banks -- more than a decade on from the financial crisis and poised to benefit if interest rates rise -- are stepping up their repurchases.

Morgan Stanley's plan to increase its dividend and shell out as much as $12 billion on buybacks over the next 12 months was among the most celebrated. The New York-based bank's shares advanced 4.1% on the week.

Opportune Time

The bank commitments come at an opportune time for stock market bulls. The rally in the S&P 500 Index that added 8% in the second quarter has been slowing down amid concerns about a potential peak in profits and high earnings multiples, not to mention risks posed by coronavirus variants that are causing infections to surge in other parts of the world.

While the benchmark has continued to notch fresh records, the trading has been tepid with the S&P 500 logging just one day in which it rallied more than 1% in the past month. The index's price to earnings multiple, on a trailing basis, is approaching 31 times compared with an average of 19 times over the past decade.

Rising bank payouts are among the top reasons that strategists at Bank of America currently rank the sector as the most attractive. Buybacks in the group could total a median 7.6% of current market capitalizations over the next 12 months, according to projections from Seaport Research Partners analyst Jim Mitchell.

While repurchases are likely to rise as economic growth continues, corporations may opt to allocate more cash to capital expenditures like technology and factories, according to Jason Benowitz, a senior portfolio manager at Roosevelt Investment Group. He's not worried about the prospect of reduced buybacks weighing on the broader market.

“There's a scarcity of great investments and interest rates are low,” Benowitz said in an interview. “The U.S. economy seems to be in a good position. Our stock market will be fine and there will be other buyers to step up if corporate buyers step back.”