Saturday, July 20, 2019

Buybacks Down In First Quarter 2019, But Remain Near A High

Late last month S&P Dow Jones Indices reported preliminary dividend and buyback results for the S&P 500 Index for first quarter of 2019. On a quarter over quarter basis dividends declined by $2.48 billion. This sequential decline in the first quarter versus the fourth quarter is not an uncommon occurrence. On a YoY basis dividends were up 7.46% and this was down from the fourth quarter YoY growth rate of 9.46%. Buybacks declined by $17.17 billion on a QoQ basis. As reported operating earnings were up significantly on a QoQ basis, +$48.32 billion or 19.9%, but only up 3.54% on a YoY basis.

One beneficial aspect to using a dividend factor in one's investment process is it provides insight into management's future expectations for a business and its expected cash flow. With this noted, the fact that the combined value of dividends plus buybacks has declined in the first quarter could be an indication managements anticipate a weakening operating environment near term. Certainly, some of the recent economic data suggests a slowing business environment has developed and may be impacting some business decisions.

As noted earlier reported earnings were up strongly QoQ but up a low single digits YoY. The payout ratio for for the S&P 500 Index has trended lower since the end of 2015, yet remains in an uptrend since 2010. Broadly, S&P 500 companies have experienced a rebound in earnings in Q1 2019, but will this growth carry over to Q2 2019 earnings where earnings season is now underway? According to Refinitiv (formally Thomson Reuters), 79 firms have reported earnings for the second quarter and 77.2% have reported above expectations. the long term average is 65% so Q2 earnings are getting off to a positive start. Assuming any near term economic weakness is simply a mild slowdown as we believe, earnings are expected to improve looking ahead twelve months and some improvement in dividend growth as well.

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