Barclays: US companies are shifting towards saving cash, weakening the effect of buybacks.

Barclays released a research report stating that stock buybacks in the US performed strongly in the 24 fiscal year, but companies are now shifting towards cash conservation. Stock buybacks are associated with lower valuations and higher returns (especially in mid-cap stocks), often driving earnings per share growth relative to net profit. In this context, Barclays introduced a market value buyback screening mechanism. Net spending by S&P 500 index component companies for buybacks increased from $707 billion in 2023 to $773 billion in 2024, second only to 2022 in the past decade. Buybacks are supported by stable cash flow. Despite a slight increase in net capital expenditure and dividends paid compared to the previous year, mergers and acquisitions have weakened (trade activity in the fourth quarter of 2024 was the lowest in the past four years), leaving some room for additional stock buybacks. Barclays noted that the number of companies repurchasing stocks in the fourth quarter of 2024 decreased compared to the same period last year. The number of large, mid, and small-cap companies repurchasing stocks decreased by 5%, 20%, and 25% respectively. As the fourth quarter of 2024 earnings season draws to a close, only 71% of S&P 500 index component companies reported buybacks for the quarter, the lowest ratio since 2020. Overall cash allocation in the fourth quarter of 2024 indicates that, with increasing economic and policy uncertainties (tariffs and immigration), companies may turn to cash conservation, choose to pay off debt, and limit acquisitions, buybacks, and dividend payments relative to the previous four quarters. Barclays has established its own equal-weight "high buyback" investment portfolios in large-cap, mid-cap, and small-cap stocks and compared their returns over the past decade to their respective benchmarks. The buyback effect is most pronounced in mid-cap stocks, and much weaker in large-cap stocks. The tailwind for buybacks has weakened, but still persists after neutralizing some sectors (especially mid-cap stocks). Buybacks are associated with lower valuations and lower net profit growth; by market capitalization, companies with the highest buyback yields in the industry typically have stock prices lower than their peers and below their historical levels. In large-cap stocks, buybacks also tend to increase earnings per share relative to net profit growth rate (intuitively, by reducing the number of shares), with the median net profit growth of high buyback stocks being the lowest. Barclays introduced a market value buyback screening mechanism using announced stock buyback data to screen for companies most likely to buy back in the future. For practical reasons, screening is liquidity-weighted and sector-constrained. To monitor buyback activity, Barclays uses announced stock buyback data to screen for companies that have announced future buyback intentions, focusing on the top 3000 US companies with liquidity stocks that have announced stock buyback plans (in the past 12 months). The remaining stocks in the plan generate "authorized income" relative to current price and market value. We screen outliers and add a quality filter to eliminate stocks with weaker balance sheets. Barclays then selects the top 50/35/15 stocks based on yield from large/mid/small-cap stocks. While Barclays monitors buyback activity, the bank does not have a view on its future direction; therefore, this buyback screening is not a trading recommendation.