This year’s equity market rally had been driven by a select few names, dubbed the "Magnificent Seven," overshadowing other industries
June brings a ‘breadth’ of fresh air with small caps and mid-size companies finally joining the party, but buyback announcement trends tell a different story
The Communication Services and Information Technology mega-caps have dominated the stock repurchase realm, though three diverse global companies from other niches offer hope for a broader-ranging second half
Through May, the 2023 stock market rally was driven by just a handful of names. Sure, you could have spotted some winning industries away from mega-cap tech, but the overwhelming evidence suggested this year’s gains were the doing of the newly minted “Magnificent Seven” on Wall Street.
June has brought a refreshing ‘breadth’ of air. Small caps and mid-size companies are at long last participating in the supposed bull market. With the S&P 500 now up about 20% from its low notched last October, bulls hope a summer season of small-cap strength can sustain more equity gains.
Buyback Breakdown: Sector Skewness and Mid-Year Musings
Where we are not seeing better breadth is in buybacks. Year to date, Russell 3000 companies have announced more than $600 billion in share repurchase plans – that's about on par with the record pace seen in 2022. But we must dig deeper.
Among the 11 S&P 500 sectors, just two are responsible for the bulk of notional buybacks; Communication Services and Information Technology dominate. With Q1 earnings season in the rearview and one more month before the next set of quarterly reports starts to cross the wires, a mid-year reflection and outlook are apropos.
Wall Street Horizon’s team of analysts confirms that the expanse of share repurchase plans is indeed modest. The 4-quarter moving average of global corporate buyback announcements runs at a 7-year low. While the first quarter of 2020 was an all-time high, a burst of post-pandemic activity in late 2021 marked a top in the bull market. The Fed’s zero-interest rate policy drew many corporate executives to reduce equity financing in lieu of relatively cheap debt. During such times, shifting the capital structure more towards debt can actually increase total firm value.
Global Buyback Announcement Count Continues Lower
Source: Wall Street Horizon. Data in the chart above represent buyback announcements from our universe of 10k publicly traded equities and does not include tender offers or open-ended plans.
Fast forward to today, and most corporations are apparently hesitant to voice buyback plans. Economic and earnings uncertainties run high. On the bright side, M&A may be on the upswing, so there’s hope that the back half of 2023 is more sanguine.
Let’s whip out our magnifying glass to inspect a trio of global firms that have had the boldness to declare buyback intentions.
Going Full Throttle
First, have you noticed the bull market powering higher in Japan? The Nikkei 225 is up a whopping nine weeks in a row. The index settled at its best level in 33 years last week, up 100% from its March 2020 bottom. While not a major holding in Japanese index funds, Subaru (OTC:FUJHY) has powered higher lately. The automaker trades near multi-year highs, and May car sales were robust on a year-over-year basis. Its 23% rise in daily selling rates (DSR) outpaced the US-market average of +18%.
All Japanese OEMs enjoyed annual sales increases for the second straight month. With Tesla (NASDAQ:TSLA) landing key partnerships with Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) lately, be on the lookout for more EV and AV headlines that could help Subaru. Back on May 11, its management team announced that it would repurchase up to 22 million shares, valued at up to 40 million yen, through September 30, 2023. Watch for potential volatility on the 21st of this month when the firm holds its annual shareholders’ meeting.
Shelling out for Shares
Now let us venture westward to the European market. Oil & gas giant Shell (NYSE:SHEL) (LON:RDSa) is a dividend favourite, but its stock price has sagged lately. With oil prices hovering around $70, down 40% from year-ago levels, the operating environment is quite a bit different and more challenging. Nevertheless, Shell announced the commencement of a $4 billion stock buyback plan on May 4.
It’s a short 3-month window, though, so we’ll be watching for longer-term plans around its Q2 earnings date of July 27. In the near term, the Energy sector company will be in play this Wednesday when it holds its annual Capital Markets Day in New York. Shell is expected to detail capital return forecasts, dividend payout policy, and how it expects to improve profitability.
Consumer Confidence?
Now let’s bring it back home to the heartland with Illinois-based Discover Financial Services (NYSE:DFS). The $29 billion market cap Financials sector firm has been on a quiet tear. The stock is up more than 20% from its May 4 low. Indeed, the force has been with DFS, and its latest mission is to reward its owners with a long-term share repurchase plan.
Before the stock went into hyperdrive in May, Discover’s Board of Directors approved a $2.7 billion buyback initiative in April that is slated to extend through June 2024. DFS could be on the move early this week as John Greene, EVP and CFO, is expected to present at the Morgan Stanley 14th Annual US Financials Payments & CRE Conference 2023. DFS is also an early reporter during the Q2 earnings season – it has an unconfirmed earnings date of Wednesday, July 19 AMC.
The Bottom Line
While S&P 500 buyback dollar figures are impressive so far this year, the total count of buyback authorizations worldwide leaves something to be desired. Still, as capital markets hopefully perk up, the second half could see renewed interest in stock repurchase activity if the economy can sidestep a recession. We’ll keep tabs on new buyback endeavours among firms big and small across the globe.