Companies have bought back huge quantities of stock this year

After a record high in 2018, redemptions so far in 2019 are strong, but slightly below the 2018 record, according to a new report by J.P. Morgan.

While redemptions reached record highs last year (around $ 800 billion), a predictable political reaction developed. Critics have argued that companies spend too much of their free cash flow to buy back shares and that they should invest more in their businesses.

Perhaps, but JP Morgan concludes that redemptions are achieving their primary objective. They improve stock prices.

"Stocks of companies buying back their stocks tend to outperform in the short and long term, and we estimate outperformance of more than 4% for high buyout companies in the United States and Europe over the last 20 and 25 years years, "concludes the report.

Indeed, global redemptions have reduced the number of shares outstanding. Net redemptions – the amount actually repurchased minus the value of new options pbaded on to employees – rise to about $ 400 billion, or half the gross amount of redemptions of $ 800 billion, but still represent a large sum d & # 39; money.

Do redemptions increase too quickly and consume too much money available from companies? The report concludes that the level of redemptions is roughly the average of the past 15 years (they account for about 2% of the market capitalization of the S & P 500 each year) and appear higher only because earnings are higher and markets are on the rise. a recording.

What about the argument that companies should spend more money on reinvestments?

Higher earnings growth raises all boats, including capital expenditures. Capital expenditures were up 12% and R & D by 11% in the fourth quarter of 2018, and they forecast robust reinvestment activity throughout the year, at an annualized rate of approximately $ 1 trillion.

Why does the buyback level hit record highs?

The stock market reached a record level and profits reached record levels. Profits have risen more than companies need capital, equity or dividends.

Another factor is that low borrowing costs facilitate the issuance of debt by businesses, some of which are used to finance redemptions.