Dividends and buybacks are on the rise, but that's not all good news

Dividends and buybacks are restored.

 

At the end of the first quarter, there were serious concerns that the levels of dividends and share buybacks would be drastically reduced. There have been cuts, but there is also good news against the background of bad ones.

 

Good and bad dividend news

 

For dividend enthusiasts, the end of the first and the beginning of the second quarter looked rather depressing. Forty-two companies from the SP 500 - almost 10% - have completely suspended dividend payments, and 25 have reduced them, in some cases significantly.

 

"It was unprecedented," said Howard Silverblatt of the Dow Jones Indices. "No company has suspended dividend payments in 2018 or 2019."

 

But when the economy reopened, the situation began to change. Five of the 42 companies that suspended dividend payments have recovered their dividends, at least in part.

 

Even as some companies recovered dividends, many more companies continued what they had been doing for years: increasing dividends.

 

This year, 216 companies increased their dividends.

 

The total figure: Silverblatt estimates that in 2020, the S'P 500 will pay $479.1 billion. dividends, which is only 1.3% lower than the 2019 record of $485.5 billion.

 

The bad news is that the yield of the SP is only 1.6%, which is one of the lowest dividend yields in decades.

 

Buyback rebounded from second-quarter lows, but companies issued far more shares

 

The second quarter started badly as companies sought to maintain liquidity by reducing buybacks. how much? In the first quarter, the companies from the SP 500 bought 199 billion dollars of their own shares. That figure fell to $89 billion in the second quarter, more than 50 percent less, according to Goldman Sachs.

 

But then a funny thing happened. Like profit, which bottomed out in the second quarter, buybacks also fell.

 

Goldman estimated that $112 billion was bought in the third quarter, up 26 percent from the second quarter, and Goldman estimates $125 billion will be repurchased in the fourth quarter.

 

That's good news. The bad news: According to Brian Reynolds, who tracks buybacks at Reynolds Strategy, while gross buybacks are rising, companies are also releasing many more new shares. Result: Net buyback volume - as many buybacks increase or decrease the total number of shares - were unchanged in the second quarter and is likely to remain unchanged until the end of the year: "The average company reported a 0.1% increase in the number of shares in the quarter compared to a 0.6% decrease a year ago," Reynolds said in a recent note.

 

The increase in the number of shares means that corporations cannot expect a buyback to increase their earnings. Reynolds noted that the buyout index of the S.P., which consists of 100 companies from the S.P., which most actively buy back their shares, has also moved from a reduction to an increase in the number of its shares. The ratings leaders include MGM, Best Buy, zualcomm, Kansas City Southern, Lennar, Cummins and Xerox.

 

"A year ago, less than 20% of the companies in this group increased their shareholding. Now it's 44%. It's an amazing shift," he said.

 

What does all this mean for investors? This year's index of S'P Buyback Index showed shortcomings, as investors bought out companies that in 2019 had a high level of buybacks for other segments of the market.

 

Reynolds concludes that perhaps it's time for those companies that can still aggressively buy back shares to outperform in terms of growth: "In terms of momentum, it looks like the shares of companies that can still buy back their shares are approaching the point where we want to buy them out on weakness."

 

On the increase in buybacks, Microsoft announced that it sharply increased buybacks in the third quarter from $5.8 billion in the second quarter to $6.74 billion.