Coincidence? Last Year, Companies Spent More on Shares Than Projects for the First Time Since the Great Recession

Corporate America got a lot richer after U.S. tax rates were slashed in late 2017. The next year, companies spent billions more on capital projects, as many had hoped. But they plowed even more of their profits into buying back company stock.In 2018, S&P 500 companies spent $806 billion on their own shares — over 26% more than they spent on capital expenses, according to S&P Dow Jones Indices. It was just the second time that stock buybacks surpassed capital spending for S&P 500 members. The previous occasion was 2007, and by the end of that year, the economy had entered a deep recession.It’s not clear whether that’s a coincidence or an omen. This time, corporate tax cuts appear to be contributing mightily to the buyback trend, which has surged for over a year. Buybacks slowed in the first quarter of 2019 but were still 8.9% higher than a year earlier, S&P reported Monday. Moreover, 1 in 4 companies used buybacks to reduce their share count by at least 4%, and S&P wants to highlight the buyback trends because they’re providing a real tailwind to earnings per share. Investors should differentiate between organic growth in profits and increases that stem from buying back shares, said Howard Silverblatt, a senior analyst for S&P. “It’s a different kind of growth,” Silverblatt said. “You do not want to pay the same multiple for both.”  Continue reading...

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