Share buybacks are on the rise in a sign that companies are sensing an improvement in the trajectory of the U.S. economy.
Companies like Meta (META), Disney (DIS), and Uber (UBER) have all announced plans to buy back their own stock this fiscal year. And companies are acting on these share buyback authorizations, with S&P 500 members buying back $63 billion worth of their own shares in the first week of February, the most in a single week, according to Deutsche Bank data. This is the highest total share buyback since May 2023.
Parag That, director of global asset allocation and U.S. equity strategy at Deutsche Bank, told Yahoo Finance that when earnings rise, share buybacks often follow. This is because a company's free cash flow often increases as its earnings improve. Companies will first use the funds to pay down debt. The remaining funds are then often used to pay dividends, increase capital expenditures to reinvest in the company, and in some cases buy back shares.
Share buybacks reduce the total amount of stock available to the public and increase investors' stake in the company and potential dividends. Although seen as a positive for investors, they are often the first to be cut in tough times.
This means that a resurgence in share buybacks could be seen as a sign that companies feel they are in a stronger position than they have been in the past few quarters, when share buybacks were in a lull. Uber Chief Financial Officer Prashanth Mahendra-Raja said the launch of Uber's first buyback plan is “a sign of confidence in the company's strong financial momentum.”
Disney CEO Bob Iger echoed similar sentiments when discussing why the company announced plans to increase its dividend and conduct its first stock buyback since 2018.
“Due to our current strength and confidence in our future path, we have already paid a dividend to our shareholders last month…as we continue to invest in our growth businesses and maintain a strong balance sheet. The company also plans to pay dividends and repurchase its own stock over the next few years,” Iger said on a Feb. 7 earnings call.
Meta now plans to pay a quarterly dividend for the first time in its history and authorize a $50 billion stock repurchase program.
The stock buybacks are a notable change for Meta, Disney and Uber, which experienced layoffs last year and now appear confident in where their businesses stand to start 2024.
While companies are still grappling with rising borrowing costs and concerns about a possible recession, the rise in share buybacks signals that companies believe their financial situation is turning a corner. There is.
“They haven't said everything is clear yet and we are probably completely out of the slowdown,” Satte said. “But at the last minute, they're saying, 'Yes, we're seeing signs and things are getting better.'”
There is another sign of corporate trust. Deals, another way for companies to spend cash flow, have also increased since the start of the year.
Capital One's (COF) proposed $35 billion takeover of Discover Financial Services (DFS) led the way by deal value, with the year-to-date increase in deal value compared to the same period last year, according to data compiled by Bloomberg. It has increased by 55%.
Jay Woods, chief global strategist at Freedom Capital Markets, recently told Yahoo Finance's Julie Hyman that the increase in deal volume is “building confidence in the market.”
“Interest rates have remained stable, allowing businesses to move forward with more confidence,” Woods said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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