Stock Buybacks Have Been Slowing. Are Dividends About to Have a Comeback?
Takeaways
- The pace of corporate buybacks has decelerated since March, according to a BofA research note.
- A shift toward dividends may be underway, bucking a decades-long trend of favoring repurchases, with valuations high and an excise on buybacks costing some companies millions of dollars.
- Dividend payers tend to outperform the broad market.
A decade-old corporate trend could be poised to revert.
Share repurchases—when companies spend excess cash to buy their own stock—have been the corporate payout method-of-choice over the last decade as low interest rates made holding cash less attractive. Tax benefits, as well as the flexibility of buyback programs, helped. But some of those factors have reversed, and valuations have risen, meaning things may be poised to change.
Though buyback activity remains at highs, companies have been pumping the brakes as the S&P 500 has bounced back from tariff-induced declines and returned to rally mode. Rates are also comparatively high now, which may also be weighing on on buybacks, making borrowing money to repurchase shares more expensive and other uses for cash more appealing.
“We have seen a deceleration in buybacks as a [percentage] of market cap since early March, suggesting elevated rates/valuations may finally be having some impact,” according to a recent note from Bank of America.
Dividend payers, which return value to shareholders directly, have become rarer. Dividends accounted for a mere 16% of the S&P 500’s returns in the decade through 2024, compared to almost 40% in the 100 years prior to 2013. Investors might welcome a return of dividend-paying stocks, which have a tendency to outperform the broader market.
Stocks are now near highs, raising concerns about valuations. A 1% excise tax introduced in the Inflation Reduction Act of 2022 is likely also part of the corporate math slowing the pace of share buybacks.
Berkshire Hathaway (BRK.A) broke its years-long streak of regular repurchases in May 2024 and has yet to resume them. (It’s also, however, never paid a dividend.) Warren Buffett explained his reasoning during Berkshire’s annual shareholder meeting in May, using Apple (AAPL), which spent some $100 billion a year buying back shares and paying the tax on those purchases, as an example.
“It doesn’t sound like much, but well, a billion dollars sounds like a lot still,” said Buffett, who said Berkshire would only buy back its shares again if they were “almost certainly underpriced.”