U.S. Capital Returns to Shareholders Are Starting to Cool

  • Total capital returns peaked in first quarter of 2016
  • Elevated debt levels, valuations begin to play bigger role

The sun appears to be setting on Corporate America’s buyback bonanza.

Total capital returned to shareholders through buybacks and dividends peaked in the first quarter of 2016 and has since fallen 12 percent. “Elevated leverage, high valuations, a focus on M&A and a bit of investor indifference to stock repurchases could extend” the slowdown, according to Gina Martin Adams and Peter Chung, equity strategists at Bloomberg Intelligence.

Share buybacks alone have fallen 20 percent in the year ended in the first quarter of 2017. In the last decade, low borrowing costs sparked by an unprecedented easing of Federal Reserve monetary policy encouraged companies to borrow to bolster cash positions. It should be noted that while buybacks have slowed from a year ago, banks have recently announced larger buyback programs.

As sales began to recover with an economy on more solid footing and with Treasury yields at historic lows, companies began rewarding shareholders. Some examples: Over the last decade, Exxon Mobil has bought almost $180 billion in shares followed by Apple at $150 billion and Microsoft and IBM battling for third at $117 billion and $116 billion, respectively.

More companies also are paying dividends. Some 976 firms in the S&P 1500 Index were paying dividends in the first quarter, a 34 percent increase from 10 years ago. The biggest gain has occurred in the information technology sector. Financial and industrial companies lead overall in the number of firms paying dividends.

With focus squarely on buybacks and dividends, and demand in the economy growing only moderately, companies have tightened their capital expenditures spigots a bit. That helps explain why productivity has been subdued.

— With assistance by Alexandre Tanzi, and Catarina Saraiva

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