Stock Buybacks Increase As Reported Earnings Jump

S&P Dow Jones Indices' recent report on buyback activity for the third quarter shows buyback activity increasing to $101.79 billion from $88.66 billion in the second quarter. With the economy mostly reopening, at least through Q3 2020, companies reported an improvement in 'as reported earnings,' increasing to $273.2 billion versus $98.5 billion for the first quarter. As the red line in the below chart shows though, buybacks remain far below the fourth quarter 2018 peak of $222.98 billion.

The green line on the above chart represents dividends and buybacks at $217.3 billion, also far below their peak of $342.8 billion in the fourth quarter of 2018. Dividends actually decreased to $115.5 billion in the third quarter versus $119.0 billion in the second quarter 2020. On a year over year basis, dividend payments are down 6% and dividends with buybacks combined are down 27.3% YOY.

The S&P Dow Jones Indices' report notes,

• "For Q4 2020, buybacks are expected to continue to rebound as more issues venture in to cover employee options; expenditures likely to remain top heavy."

• "The top 20 issues dominated the buybacks, accounting for 77.4% of all buybacks, down from the record Q2 2020’s 87.2% and up from the historical 46.2% average.

• "Apple (AAPL) continued to lead, spending $17.59 billion in Q3 2020, ranking 11th in S&P 500 history.

• "Berkshire Hathaway (BRK), was next (dare we dream of a dividend): $9.0 billion for Q3 2020, up from $5.0 billion for Q2 2020; for the 12-months ending in September 2020 they spent $17.8 billion versus $3.2 billion.

• "Intel (INTC): $8.0 billion for Q3 20120, up from none for Q2 2020; for the 12-months ending in September 2020 they spent $15.8 billion versus $12.4 billion.

• "Alphabet (GOOG/L): $7.9 billion for Q3 2020, up from $6.9 billion in Q2 2020; for the 12-months ending in September 2020 they spent $29.3 billion versus $14.9 billion.

• "Microsoft (MSFT): $6.7 billion for Q3 2020, up from the $5.8 billion spent in Q2 2020; for the 12-months ending in September 2020 they spent $24.8 billion versus $20.7 billion."

For companies committing to return capital to shareholders, a dividend payment, and an increasing one at that, is a better sign the company sees a sustainable improvement in their future growth prospects versus buybacks that can be announced then ultimately not completed. Nonetheless, this improving buyback environment is one sign of a further improvement in business prospects, especially as the vaccine rollout continues to unfold.