Corporate Buybacks, Rising Rates, And Commodities

Corporate buybacks have been a significant tailwind for higher stock prices in recent years; however, after COVID hit in early 2020, corporations largely put off buying back their own stock or issuing dividends with rising uncertainty over the outlook for earnings and growth.

Gina Martin Adams, Chief Equity Strategist at Bloomberg Intelligence, said with a large amount of cash now sitting on corporate balance sheets, we are likely to see a wave of repurchases and dividend payments in 2021.

Here's what Gina had to say in our recent interview with her on Financial Sense Newshour (see 2021 May See a Surge in Buybacks and Dividends, Says Gina Martin Adams for audio).

Buybacks Supporting Stock Prices

Right now, investors are focused on inflation pressures and whether rates will rise too much over the course of the year, Adams said. However, corporate earnings are recovering much more quickly than anyone anticipated, she added.

And, at the same time, companies are sitting on a record amount of cash at roughly 6 percent of total assets on the balance sheet, which is well above the longer term average.

(Click on image to enlarge)

US Census Bureau, Quarterly Financial Report: US Corporations: All Information: Total Cash on Hand and in US Banks [QFRTCASHINFUSNO], retrieved from FRED, Federal Reserve Bank of St. Louis; March 2, 2021

We’re likely going to see redeployment of dividends and a wave of repurchases to make up for the cuts to both of these programs during the COVID recession, Adams stated.

She expects to see roughly 15 percent dividend growth over the course of 2021 and close to 50 percent growth in repurchases. As of the first two months of this year, stock buybacks are already at the fastest pace in 15 years, according to the most recent EPFR data.

Source: Bloomberg, EPFR

Add corporate America to the growing army of buyers. Companies—a reliable ally of the last bull market—were forced to retreat and preserve cash during the 2020 pandemic, but are splurging on their own shares again. Their announced buybacks have averaged $6.9 billion a day this earnings season, the most since at least 2006, according to quarterly data compiled by EPFR. (Source)

Rising Rates Not a Worry...Yet

Many investors have been concerned about the recent increase in long-term rates. Though fiscal spending and debt continue to grow, it’s easy not to think about these things until servicing that debt becomes very expensive.

Looking at actual interest payments on the debt as a share of GDP, Adams stated, rates have bounced around between 2 and 3 percent for the last several years.

Even with the extraordinary growth in spending in 2020, interest payments are still not exploding higher, she noted. Typically, we would need to see interest rates head meaningfully higher for this to be a concern. See Craig Johnson on 2021 Market Outlook, Rising Rates, and "Green" Metals

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