Stock Buybacks Top Capex for First Time Since 2008, Citi Says

(Bloomberg) -- The latest proof of corporate America's obsession with its own stock is in. But Citigroup Inc. says it's no big deal.

Companies in the S&P 500 probably repurchased more than $800 billion of shares last year, an amount that surpassed the total they invested new or upgraded plant and equipment, data compiled by Citigroup showed. It's the first time since 2008 that buybacks topped capital expenditures, a statistic that's sure to draw more ire from politicians who have threatened to increase regulations on corporations buying back their own stock.

At the top of a list of criticisms is that the buyback boom shows company executives eager to appease shareholders in the short term at the expense of strategies with long-term benefits involving capital investment. Such blame is unjustified, according to Citi's strategist Tobias Levkovich.

Last year's jump in buybacks was partly due to the 2017 tax overhaul designed to bolster profits and encourage companies to bring home overseas cash. Viewed through a wider lens, capex still dominates companies' use of cash, with business investment exceeding $6 trillion over the past decade, Citi data showed. Over the same stretch, buybacks reached $5.1 trillion.

“Investors have been fed a misleading narrative of corporates using cash to repurchase shares at the expense of capital investment,” Levkovich wrote in a note Friday. “The noise from lawmakers on the issue seems to be misplaced.”

Buybacks have been under growing attack as politicians focus on corporate governance as an election issue. Last month, Senate Minority Leader Chuck Schumer (D-N.Y.) and Senator Bernie Sanders (I-Vt.) said they'd introduce legislation barring companies from buying back their own stock unless they first increase workers' pay and benefits. A few days later, Senator Marco Rubio (R-Fla.) announced a plan to tax buybacks on an equal footing with dividends.

Amid a rising political uproar surrounding buybacks, corporate America hasn't slowed down its shopping spree. At Bank of America's trading desk that helps corporate clients execute repurchases, orders have been running 71 percent higher this year compared with the same period in 2018.

Two months into the year, companies have announced plans to repurchase $226 billion of their own stock, up about 7 percent from a year ago, according to data compiled by Birinyi Associates Inc.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Scott Schnipper

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