The rise in buybacks is remarkable. After plummeting during the first half 2020, buybacks increased six quarters consecutively and now stand poised to record a year.

S&P 500 stock buybacks:
Q1 20 – $199 billion
Q2 20 – $89 billion
Q3 20: $102 Billion
Q4 20: $131 Billion
Q1 21: $178 Billion
Q2 21 – $199 billion
Q3 21 – $234.6 billion
Q4 21 (est.) $238 billion
Source: S&P Dow Jones Indices

The total volume of buybacks for 2021 will exceed $806 billion in 2018, which was a record.

Technology and financial services are fueling this surge

A small number of companies are responsible for the majority of buybacks. Nearly 30% of buybacks occurred in the third quarter among the top five companies. Technology companies make up four of these five.

Buyback monsters
(largest buybacks, Q3 2021)

Apple £20.4 billion
Meta Platforms $15 billion
Alphabet $12.6 billion
Bank of America $9.9B
Oracle 8.8 Billion
Source: S&P Dow Jones Indices

Why is buyback so concentrated within tech companies? This is because they have the most cashflow, and can buy back stock.

Because so many people have returned excess capital, financials made this year’s buyback list return. Morgan Stanley, American Express, and Morgan Stanley also made large buybacks.

Buybacks are good for investors?

Investors are not benefited by buybacks that don’t also lower share counts. It is actually the decreased share count which improves earnings per share. This is what investors desire.

However, buybacks are often announced by companies even though they offer new options for executives and employees. This does not lower share counts. These employees as well as the executives are using these options.

This is like emptying a swimming-pool (buying back stock), and then filling it with a hose (creating options for new stock).

These results are often a wash. The total share count for the S&P 500 is slightly higher today than it was in 2018.

S&P 500: shares outstanding
2019 $300 Billion
2020 $296 Billion
2020: $312 Billion
2021 (YTD $306 Billion)
Source: S&P Dow Jones Indices

There’s an additional reason buybacks are not generating share count reductions despite record amounts of money spent: buybacks are executed in dollars, not shares bought back, but the S&P 500 is up almost 50% since the end of 2019.

“The impact on share count remains significantly lower compared to previous years as higher stock prices have reduced the number of shares companies can buy back with their current expenditures,” Howard Silverblatt, who tracks buybacks as senior index analyst for S&P Dow Jones Indices, said in a recent note to clients.

Silverblatt states that, “despite spending over $2 trillion on buybacks between 2018 and 2018, the share count has increased.”

These are some companies who actually decrease their share count.

Some buybacks can reduce share counts and result in significant increases in earnings per share, even the biggest tech companies.

Buyback monsters
Since 2018, there has been a reduction in share count

Apple 19%
Alphabet 9%
Facebook 1 %
Oracle 35%
Microsoft 3 %

2022: Another record-breaking year

Watchers of buybacks see potential for another record in 2022. With consumer confidence still high and corporate profits up by at least 10%, they are optimistic.

Ben Silverman (director of research at InsiderScore) said that the record pace of buybacks in 2021’s second half will probably continue into 2022, as U.S. businesses find their balance sheets full of cash for the new year.

SIlverblatt also agrees but there is a catch: Companies are likely to spend more, which will be needed to purchase higher-priced shares. However, it won’t have an impact on share counts.

Buybacks should be subject to tax

Washington is furious about the large sums of money spent on buybacks. Washingtonians have always complained buybacks enrich the management.

In President Joe Biden’s Build Back better plan, he proposes a 1 percent tax on buybacks. The proposed tax, which is expected to bring in $124 billion per year over 10 years is still being discussed.

The Tax Policy Center has arguedBuybacks reduce the tax burden on corporations as they permit greater capital gains deferral. According to the center, buybacks are a fair way of reducing the tax benefit because they avoid taxation at the investor level.