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Keep the change: Record share of investors worry buybacks, dividends are too generous

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Many investors would prefer that companies use cash on hand to pay down debt.

U.S. companies have repurchased their own shares at an astounding rate in recent years, and now a record share of institutional investors are worried that companies are being too generous with stock repurchases and dividend payouts, according to Bank of America’s latest fund manager survey.

The survey showed that 38% of respondents say that payout ratios, including dividends and share buybacks, are too high, above the previous record set in 2016, indicating that even as buybacks have helped power the S&P 500 index SPX, -0.44% Dow Jones Industrial Average DJIA, -0.25% and Nasdaq Composite index COMP, -0.22% to record highs in 2019, the smart money is beginning to worry how sustainable the buyback binge is.

Many investors would prefer that companies use cash on hand to pay down debt, with 48% of respondents saying that corporate debt levels are “excessively high,” according to the report.

The rising concern over buybacks coincides with a sharp decline in announced buybacks so far this year, with U.S. companies announcing $511 billion in buybacks through the end of June, down from $659 billion last year, according to Michael Schoonover, chief operating officer at Catalyst Capital Advisors and portfolio manager of the firm’s buyback-focused fund.

The decline in buyback announcements is a recent phenomenon. Through April, buyback announcements were actually ahead of last year’s pace. However, as U.S.-China trade tensions rose beginning in May, companies became more cautious, he said.

“Tech firms especially went offline,” he said, noting that in May and June, companies in the information-technology sector accounted for just 3% of buyback announcements, versus 24% in 2018. “There is more serious concern from these companies about what the near term is going to look like.”

And investors are putting their money where their mouths are, in that they are not rewarding companies for buying back their own stock as much as they had been in the recent past, according to a recent analysis by Morgan Stanley chief equity strategist Mike Wilson.

“The market has rewarded companies for buying back shares over the past 3 years . . . though this effect has waned over the past year,” he wrote, adding that because the total payout ratio for S&P 500 firms is near record highs, and earnings growth has been anemic in recent quarters, corporations have little room to increase buybacks from here.

“As earnings growth decelerates from here, we expect total payout growth to decelerate as well,” Wilson wrote. “Total payouts have exceeded total free cash flows for more than 5 years now, and we suspect slowing cash flow growth will make CFOs less willing to spend their cash to repurchase shares.”


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