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Market Perspective - May 2018


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Market Perspective - May 2018

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Market Perspective - May 2018

  1. 1. Market Perspective – May 2018 Experience Insight Impact Overview: With current U.S. tax policy helping to steer large amounts of cash back onshore for domestic multi-national companies, many investors are asking how this cash will be spent. This month, within a historical framework, we explore the expectations for share repurchases as a portion of this capital utilization. 1 Source: Google Images
  2. 2. What Is A Share Repurchase? Experience Insight Impact 2 A share repurchase program (aka a “share buyback” or simply “buyback”) is when a company purchases shares of their stock (typically in the open markets, although there are variations) in order to reduce the total number of shares outstanding. There are several reasons why this is typically deemed to be positive by market participants. Some of the key reasons are: • Undervalued: Companies tend to use buybacks to deploy capital when they view their stock as being undervalued. • Cash Flow Expectations: Typically a company will deliver cash back to shareholders via buybacks (or dividends) when cash flows are strong. • Lowering The Supply: Reducing the “float” by retiring outstanding shares could drive the stock higher by reducing the supply of available shares. • Growing The “Per Share” Metric: By reducing the outstanding share count, and assuming idle cash is not earning a compelling interest rate, the per share calculation will be driven up. If the E (~earnings) in Earnings Per Share (“EPS”) stays consistent, and the share count is reduced, the overall EPS number will likely rise. • Distributing Cash Back: Share repurchases, unlike dividends, do not have immediate tax costs, providing a more efficient distribution to shareholders. Source: Google Images
  3. 3. Where Is Capital Being Deployed? Experience Insight Impact 3 While capital use should rise dramatically following several lackluster years (and meaningful changes to the tax code), buybacks are expected to experience the fastest growth in quite some time at 23%. Some analysts will combine dividends and buybacks to provide a “shareholder yield” to investors approaching 5% for the S&P 500.
  4. 4. Record Share Repurchases Expected Experience Insight Impact 4 Source: Barrons; S&P Dow Jones Indices; Goldman Sachs Share repurchases are expected to reach all time highs in 2018, exceeding the prior peak in 2007.
  5. 5. Share Repurchases Don’t Always Result In Higher Stock Prices Experience Insight Impact 5 Source: Bloomberg, Goldman Sachs Asset Management • As the chart on the right suggests, share repurchases do not always result in a higher stock price. • Examples, such as General Electric and IBM, further exemplify that buybacks, while generally positive, are typically not solely responsible for share performance. Companies must be careful not to “starve” operations of growth capital. Both companies had large buybacks, but the stocks performed poorly as the share repurchases could not hide lackluster growth. • Strong fundamentals and strong cash flow must accompany buybacks to be successful. Apple would be an example of such a situation. The company has repurchased more than $200 billion of its own stock since 2012, while emphasizing that it is plowing $30 billion into domestic capital spending in the upcoming years.
  6. 6. Market Perspective – May 2018 Experience Insight Impact Conclusion: In general, well-executed share repurchases can serve investor’s interests over time. Currently, with U.S. tax reform as one driver, we are seeing accelerations of such programs in a wide variety of industries (although there is some concentration amongst the mega-cap, multi- national companies). Repurchasing shares of stock by any company must be accompanied and viewed alongside fundamentals to provide investors with insight into the future. More broadly, we look to utilize this indicator as one of many tools to evaluate economic conditions. 6 Source: Google Images
  7. 7. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 7