Barclays: US companies shift to cash conservation, buyback effects weaken

According to the Zhitong Finance APP, Barclays has released a research report stating that stock buyback activities in the US performed strongly in fiscal year 2024, but companies are now shifting towards cash conservation. Buyback activities are associated with lower valuations and higher returns (especially among mid-cap stocks), which often drive the growth of earnings per share relative to net profits. In this context, Barclays has introduced a full market capitalization buyback screening mechanism. The net expenditure for buybacks by S&P 500 constituent companies rose from USD 707 billion in 2023 to USD 773 billion in 2024, second only to 2022 in the past decade. Buybacks are supported by stable cash flows. Although net capital expenditures and paid dividends have increased compared to the previous year, merger and acquisition activities have weakened (the trading activity in the fourth quarter of 2024 is the lowest in the past four years), leaving some room for additional stock buybacks. Barclays noted that recently, the number of companies buying back stocks in the fourth quarter of 2024 has decreased. Compared to the same period last year, the number of large, mid, and small-cap companies buying back stocks decreased by 5%, 20%, and 25%, respectively. As the earnings season for the fourth quarter of 2024 comes to a close, only 71% of S&P 500 constituent companies reported buybacks for the quarter, the lowest ratio since 2020. The overall cash allocation in the fourth quarter of 2024 indicates that, amid rising economic and policy uncertainties (tariffs and immigration), companies may turn to cash conservation, opting to pay down debt and limiting acquisitions, buybacks, and dividend expenditures compared to the previous four quarters. Barclays has established its equal-weight "high buyback" portfolio among large-cap, mid-cap, and small-cap stocks, comparing their returns over the past decade with their respective benchmarks. The buyback effect is most pronounced among mid-cap stocks, while it is much weaker among large-cap stocks. Although the tailwinds for buybacks have weakened, they still exist after neutralizing some sectors (especially mid-cap stocks). Buybacks are associated with lower valuations and lower net profit growth; in terms of market capitalization, companies with the highest buyback yields in the industry typically have stock prices lower than their peers and below their historical levels. Among large-cap stocks, buybacks also tend to increase the growth rate of earnings per share relative to net profits (intuitively, by reducing the number of shares), with the median net profit growth of high buyback stocks being the lowest compared to higher earnings per share growth. Barclays has introduced a full market capitalization buyback screening mechanism, utilizing stock buyback announcement data to screen for companies most likely to conduct buybacks in the future. For practical considerations, the screening is liquidity-weighted and sector-restricted. To monitor buyback activities, Barclays uses stock buyback announcement data to screen companies that have already announced future buyback intentions, focusing on the top 3,000 liquid stocks in the US that are currently undergoing buyback plans (announced in the past 12 months). The remaining planned stocks generate "authorized returns" relative to current prices and market capitalizations. We screen for outliers and add a quality filter to eliminate stocks with weaker balance sheets. Barclays then selects the top 50/35/15 stocks from large/mid/small-cap stocks based on yield. While Barclays monitors buyback activities, the bank has no view on their future direction; therefore, this buyback screening is not a trading recommendation