U.S. Markets

Share buybacks could add fuel to Wall Street rebound

SAN FRANCISCO (Reuters) - Companies snapping up their own shares might provide additional fuel for the U.S. stock market to rebound in coming weeks following a wave of strong quarterly earnings reports and tax cuts that have left more cash on balance sheets.

A trader works on the floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., February 9, 2018. REUTERS/Andrew Kelly

Wall Street’s slump last week, which confirmed it was in correction territory from record highs in late January, came as many companies temporarily scaled back their share buyback programs before reporting their quarterly results, a factor that may have exacerbated the drop, Goldman Sachs said in a recent research note.

The S&P 500 on Monday jumped 1.39 percent, up for a second straight session and giving Wall Street a boost of confidence following it worst week in two years.

With most U.S. corporations now having provided their reports, and with overall earnings for the fourth quarter beatings analysts’ expectations, companies resuming or increasing their share purchases might give the market more stability.

Modern IR, which provides data analytics to help companies manage their share buybacks, in recent days has seen many of its clients step up repurchases of their shares.

“There are big names that we support who have been active with buybacks post results,” said Modern IR President Tim Quast. “With the market having dropped sharply, it’s a pretty good use of cash.”

To reward shareholders, companies often buy back shares through long-term plans.

CSX Corp's CSX.O stock jumped 4.5 percent on Monday after the U.S. railroad hiked its dividend and increased its share buyback plan for the next year to $5 billion.

Some companies also buy back shares tactically, with chief financial officers weighing in on changes in share prices. Companies typically suspend those kinds of buybacks ahead of quarterly reports in order to avoid illegal insider trading.

“What we saw last week was a lack of a bid in the market, and maybe part of the problem was a lack of buybacks,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “If you’re seeing buybacks in the market, that tends to be bullish.”

Following deep corporate tax cuts signed by President Donald Trump in December, U.S. companies in recent weeks have boosted their earnings forecasts, and many have said they would increase investments and give more money back to shareholders.

Two thirds of the way through reporting season, S&P 500 companies’ fourth-quarter earnings have jumped 14.8 percent compared to the year-ago period, according to Thomson Reuters I/B/E/S.

Still, in recent weeks, companies that typically buy back a lot of their shares have not outperformed the market. The S&P 500 Buyback index .SPBUYUP which tracks stocks with the highest buyback ratios, fell 8.8 percent from Jan. 26 through last Friday, the same as the broader S&P 500 .SPX.

“What we know is that available cash is higher. What we believe is that it’s going to be used for a combination of things: share repurchases, dividend increases, some capex and M&A, and all of those are positive,” said Steve Chiavarone, a portfolio manager at Federated Investors.

Reporting by Noel Randewich; Editing by Tom Brown