Syahrir Maulana
Strong earnings growth will be a tailwind for share buybacks, according to Goldman Sachs, which is raising its buyback forecast for this year.
After seeing the second biggest drop in the S&P 500 (NYSERCA:SPY) (IVV) (VOO) buybacks In 2023, Goldman now expects S&P 500 companies to buy back $925 billion in stock this year, up 13% year over year and higher than the initial forecast of 4% growth. Buybacks will increase 16% in 2025 to $1.075 billion in 2024, Goldman said.
“Earnings growth is the most important driver of share buybacks at the index level, explaining about half of the year-over-year variation,” said strategist Cormac Conners. “We recently raised our EPS guidance for 2024 ($241 per share, 8% growth) and 2025 ($256, 6% growth) due to the improving economic growth environment and stronger mega-cap tech margins and earnings. than previously expected.”
“Improvements in the broader macroeconomic environment since the fall, such as declining Treasury (SHY)(IEI)(IEF)(TBT)(TLT) yields, also help inform our forecast upgrade,” Conners said.
“While we expect Treasury yields to remain elevated, the start of Fed easing in the middle of this year should drive somewhat looser credit conditions by 2025,” he said.
According to Goldman, Info tech (XLK) and Communication Services (XLC) will be the main drivers of buyback growth at the index level. This will be partially offset by weakness in Energy (XLE) buybacks.
“The Magnificent 7 (AAPL) (AMZN) (GOOG) (META) (MSFT) (NVDA) (TSLA) are likely to drive a substantial portion of the S&P 500's buyback growth,” Conners said. “Even though the group's net income increased by 43% in 2023, the group's aggregate buybacks fell by 11%. The proportion of the group's net income paid in buybacks in 2023 was the lowest since 2017 (58%) , indicating that companies may have capacity to increase their buyback payment in 2024.”
“Even if the group's buyback payout ratio does not increase, the consensus expected rapid earnings growth in 2024 (19%) and 2025 (15%) should drive proportional growth in buybacks,” he said. “Repurchase authorizations for these shares also point to solid growth. Documents filed in the fourth quarter show that the group is currently authorized to repurchase $215 billion in shares, 30% more than the level authorized in the same time of last year ($166 billion), led by META (+$30 billion y/y), NVDA (+$15 billion), and AAPL (+$12 billion).”
“Dividend initiation is a risk to the Magnificent 7's buyback growth,” Conners said.
“Three of the Magnificent 7 do not pay any dividends (GOOGL, AMZN, and TSLA). We recently found that large companies with stable earnings, high profit margins, and cheap valuations are the most likely to initiate dividends. Using this framework, GOOGL and AMZN respectively rank as the 1st and 8th most likely Russell 3000 stocks (IWV) to initiate a dividend. We expect buybacks to remain the largest cash return strategy for the largest tech stocks due to their flexibility and tax efficiency”.
“However, the Magnificent 7 may shift their cash return strategies more in favor of dividends as their cash flows become increasingly stable and companies look to expand their investor bases,” he said.
