Dividends and buybacks are reversed.
At the end of the first quarter, there were serious concerns that dividend and share buyback levels would be sharply cut. There were layoffs, but there is good news against the backdrop of bad news.
Good and bad news about dividends
For dividend lovers, the end of the first and the beginning of the second quarter looked pretty depressing. Forty-two of the S&P 500 - almost 10% - have suspended dividend payments entirely, and 25 have cut dividend payments, in some cases significantly.
“It was unprecedented,” said Howard Silverblatt of S&P Dow Jones Indices. "No company has suspended dividend payments in 2018 or 2019."
But when the economy reopened, things began to change. Five of the 42 companies that have suspended dividend payments have restored their dividends, at least in part.
Even when some companies recovered dividends, many more companies continued what they had done for years: increased dividends.
This year, 216 companies have increased their dividends.
Bottom Line: Silverblatt estimates the S&P 500 will pay $ 479.1 billion in dividends in 2020, just 1.3% below the 2019 record of $ 485.5 billion.
Bad news: The S&P is only yielding 1.6%, one of the lowest dividend yields in decades.
Buybacks bounced off second-quarter lows, but companies issued many more shares
The second quarter started off badly as companies sought to maintain liquidity by cutting back buybacks. How much? In the first quarter, S&P 500 companies bought back $ 199 billion of their own shares. In the second quarter, that figure fell to $ 89 billion, more than 50% less, according to Goldman Sachs.
But then a funny thing happened. Like profits that bottomed out in the second quarter, buybacks also fell.
Goldman estimates that $ 112 billion was bought in the third quarter, up 26% from the second quarter, and Goldman estimates that $ 125 billion will be bought back in the fourth quarter.
This is good news. The bad news is that as gross buybacks rise, companies are also issuing a lot more new shares, according to Brian Reynolds, who tracks buybacks at Reynolds Strategy. Result: Net buybacks - by how many buybacks increase or decrease the total number of shares - were flat in the second quarter and will likely remain unchanged for the rest of the year as well: “The average company reported a 0.1% increase in shares this quarter. compared with a 0.6% decline in stocks a year ago, ”Reynolds said in a recent post.
The increase in the number of shares means that corporations cannot count on buybacks to increase their earnings. Reynolds noted that the S&P Buyback Index, which is made up of the 100 S&P companies that are most actively buying back their shares, also moved from cutting to increasing the number of their shares. Ranking leaders include MGM, Best Buy, Qualcomm, Kansas City Southern, Lennar, Cummins, and Xerox.
“A year ago, less than 20% of companies in this group increased their share of shares. Now it is 44%. This is an amazing shift, ”he said.
What does all this mean for investors? This year, the S&P Buyback Index showed flaws as investors bought out companies that had high buyback rates for other market segments in 2019.
Reynolds concludes that it may be time for those companies that can still aggressively buy back to outpace growth: “In terms of momentum, it looks like stocks in companies that can still buy back their shares are approaching. the moment we want to redeem them on weakness. "
Speaking of the increase in buybacks: After the closure, Microsoft announced that it had sharply increased its buybacks in the third quarter, from $ 5.8 billion in the second quarter to $ 6.74 billion.