In a white paper titled, “Taking Stock,” published by MSCI and written by Ric Marshall, Pano Seretis, and Agnes Grunfeld, the authors analyze the effect of share buybacks. As we have written in a number of prior posts, particularly following US tax reform, corporate share buybacks have been criticized in the popular press as well as by regulators. The whitepaper studies buyback activity at the 610 MSCI USA Index constituents and track share buybacks versus capital expenditures and R&D spending. Buybacks exceeded capital expenditures and R&D spending for the first time in 2015. Of the 610 index constituents, 91 percent, or 554, bought back shares at some point during the study period. Buybacks continued to increase even as valuations increased, which is contrary to the prevailing view that companies engage in buybacks when shares are undervalued. Share buybacks have returned more cash to investors than dividends in the 15-year study period, with repurchases among the index constituents totalling $5.19 trillion and cash dividends totalling $3.86 trillion. The study notes that buyback activity varies among industry sectors with activity highest among tech, consumer discretionary/staples sectors, and lowest among telecom, real estate and utilities. The companies with the highest MSCI ESG ratings were among the most active in buybacks. MSCI also calculated 10-year economic spreads for 512 companies and of these only 74 experienced a negative spread or loss of value. MSCI concluded that there was no evidence that companies were diverting resources to buybacks instead of reinvestment.
