A squeeze on earnings and a rise in funding costs have persuaded many US companies to commit less cash to buying back their own shares this year.
Reducing buybacks could remove a major source of support to the stock market, analysts say.
“Not only has the volume [of share buybacks] declined, but the number of companies rolling out big repurchases has fallen sharply,” says David Santschi, CEO of TrimTabs Investment Research. “Stock buybacks—many of them funded with borrowed money—have been a key source of fuel for the bull market.”
By this time last year, 45 companies had announced buybacks of at least $2 billion each, compared with only 23 so far this year, according to TrimTabs.
US companies have been the main buyer of US equities in the form of share buybacks, HSBC analysts Anton Tonev and Davey Jose wrote in a recent report, noting: “A squeeze on company profits and a rise in US corporate funding rates could cause a substantial decline in buyback activity and thus marginalize a major buyer.”