Share buybacks on the US stock market have dropped to the slowest pace since the early stages of the pandemic as rising interest rates and high stock prices undermine the incentive for companies to buy their own shares.
Companies in the benchmark S&P 500 index spent $175 billion buying back shares in the three months to June 2023, a 20% decline from the same quarter last year and a 19% decline from the first three months of 2023. The slowdown is likely to be the beginning of a longer-term trend that could put downward pressure on stock markets.
Corporate buybacks have become an increasingly important part of stock markets in recent years. They can directly prop up share prices by adding to demand and also help improve profitability on an earnings per share basis by reducing the number of shares in circulation.
However, critics of share buybacks accuse company boards of using them to artificially inflate share prices and reward senior executives instead of spending on long-term investment or increasing pay for lower-paid employees.
Companies are now facing a combination of new investment demands and higher borrowing costs, making buybacks less of a priority. Businesses are facing increased pressure to invest in areas such as reshoring supply chains, automation and artificial intelligence and reaching net zero targets.
US stock buybacks have also been subject to a new 1% tax since the start of this year. There are some expectations that this tax could be increased in coming years, which could put further pressure on buybacks, and shift spending back to dividends.
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