Spending on buybacks by the largest U.S. repurchasers reached an all-time high, at over $3 trillion, during the five-year period ending in 2019.
We observed a significant increase in buyback spending relative to other uses of capital, including organic investment, cash acquisitions, and dividends.
For the first time, more than half of the analyzed companies demonstrated good buyback timing; though nearly half bought back more stock at high prices.
We launch the "Fortuna Buyback Fitness Test" to determine a company's overall suitability for buybacks.
We present the 2020 Fortuna Buyback ROI Report in the context of a larger debate over the efficacy and ethics of share buybacks. Critics claim that buybacks encourage bad behavior and crowd out reinvestment in long-term earnings and employee wages. This criticism peaked during the COVID-19 pandemic as companies sought government relief. Why, detractors asked, did so many companies choose to increase their financial risk by borrowing to repurchase stock? The reality is that not all companies are good buyback candidates, and some took on excessive risk by aggressively borrowing to repurchase stock. We introduce a "Buyback Fitness Test" in the report to help companies understand their buyback prospects and, based on performance volatility, we estimate that 22% of the studied repurchases should have been avoided altogether.
Despite their risks, buybacks play a role in recycling excess cash to the next generation of Amazons and Apples, and help facilitate a more efficient allocation of resources across the economy. Beyond these benefits, many companies face ample opportunities to repurchase during share-price dips, which can create value for remaining shareholders. Unfortunately, during the scope of our study, almost half of the S&P 500's largest repurchasers bought back more stock when it was expensive, relative to the price trend.
Corporate spending over the last five years by the S&P 500's largest repurchasers exceeded $3 trillion for the first time, just as buyback spending increased at a faster rate than organic investment, cash acquisitions, and dividends. With this dramatic rise in buyback spending, investors, analysts, and management teams will increasingly focus their efforts on designing and encouraging buyback programs that capture more value. The goal of this report is to help managements understand how buybacks deliver returns and embrace methods to deliver higher total shareholder return (TSR) through optimized share repurchases.
Fortuna Advisors LLC (fortuna-advisors.com) is an innovative strategy consulting firm that collaborates with business leaders to deliver superior Total Shareholder Returns (TSR) through better strategic resource allocation and performance measurement.