- In 2014, the S&P 500 Index's dividend (1.9%) + buyback (2.9%) yield = 4.8%, but this yield was not realized by investors.
- As in most years, in 2014 issuance of new shares—for management compensation, new investments, and funding mergers and acquisitions—exceeded buybacks.
- The dilution rate for the U.S. equity market in 2014 was 1.8% compared to the historical dilution rate of 1.7% over the 80-year period from 1935 to 2014.
- U.S. equity investors in aggregate—contrary to appearances—have not realized a benefit from the recent spate of stock repurchases.
Like travelers in the desert searching for water, we survey the parched investment landscape looking for high-yielding assets to quench our thirst for investment income. Shimmering on the barren surface of zero real yields, is that a lush garden of stock buybacks that we spy on the horizon? We examine the impact on investors of the recent increase in buybacks using an approach introduced by Bernstein and Arnott (2003).
In 2014, buybacks represented 2.9% of the S&P 500 Index's market capitalization. When this distribution of cash is added to the 1.9% dividend yield of the S&P 500,1 it produces a dividend-plus-buyback yield of 4.8%. For yield-thirsty investors, this combination appears to be an oasis in the capital market desert. To be that oasis, however, buybacks must not be diluted by net new issuance. We scour a range of sources to tally new issuance, discuss why companies issue new stock, and explain the possible dilutive impact of this new issuance.
Who's Buying Back Stock?
In 2013, S&P 500 companies, the largest in the United States but nonetheless a subset of the market, spent $521 billion on buybacks. In 2014 that amount rose to $634 billion and moved higher still to $696 billion when total repurchases by all publicly traded companies in the U.S. market are included.2 The top 15 companies by repurchases are listed in Table 1.
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Six of the 15 top companies are in the tech sector: Apple, IBM, Intel, Cisco, Oracle, and Microsoft. Combined, these six huge cash-flow-generating companies are responsible for 14% of all public company buybacks in 2014. Apple alone bought back $45 billion of its stock, nearly equivalent to the annual gross national product of Costa Rica, a country with a population of 5 million.
In order to ascertain the true impact of a company's repurchases on its shareholders, we need to determine the amount of stock a company issues over the same period it is buying back its stock.