Dividends and US buyback market support may wane this year

Last year, the Trump administration cut taxes to corporations, the administration believed corporations were going to invest more in their operations in the US, likely increasing their workforce. Most did not at least not to a degree a tax break of the magnitude one would hope for. According to Sinead Carew of Reuters article Companies bought back 2.8% of shares outstanding in 2018. This was a substantial support to the market and bigger than dividends, said Jack Ablin of Cresset Wealth Advisors in Chicago. This year growth in cash flow will be slower.

The 2.8% represents $583.4 billion of their stock in the first 3 quarters. In 2007, the record was $589.1 billion according to S&P Dow Jones Indices data.

In 2018, about $295 billion of foreign profits in the first quarter of 2018. About $190 billion were used on buybacks according to JPMorgan strategist Nikolaos Panigirtzoglou.

Datatrek Research said US companies tend to spend between 40 and 60% of operating income on buybacks.

Linking to dividend paying stocks, when stocks are bought back there are fewer shares which makes the EPS higher and when applied to the normal multiplier tends to send stock prices higher. If you buy shares for the dividends over the long term the stocks tend to raise overtime and your total return on capital is higher. Your risk return ratio stays relatively low and over the long term increases. What is not to like?

There are more questions than answers, till the next time – to raising questions.

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