Markets in a Minute
Charted: The Rise of Stock Buybacks Over 20 Years
This infographic is available as a poster.
This infographic is available as a poster.
Chart: The Rise of Stock Buybacks Over 20 Years
Despite market turbulence, stock buybacks are on track to hit record levels by year-end.
Spurring this wave of buybacks are strong corporate cash flows—sitting near $2 trillion—and a 1% excise tax on buybacks approaching in 2023. This signals a vote of confidence from corporations on their financial health even as a recession looms large.
In this Markets in a Minute from New York Life Investments, we chart the growth of buybacks over the last two decades and the implications for investors looking ahead.
How Stock Buybacks Work
In stock buybacks, corporations buy their own shares from existing shareholders. This reduces the number of shares in the market and boosts earnings per share. Often, this can increase share prices given the rise in earnings growth.
It was not until 1982 that share repurchases became legal, driving wider usage among corporations as a capital allocation tool.
By comparison, dividends are another common form of distributing capital back to shareholders.
Dividends are bound by strict policies and do not offer the same tax advantages and flexibility as buybacks. While dividends are taxed as income, buybacks are taxed as capital gains—making them a preferential choice for investors. Given these advantages, stock buybacks have outpaced dividends over the last two decades.
In fact, in the third quarter of 2022, an estimated one in five companies in the S&P 500 Index conducted buybacks that in turn increased their earnings per share by at least 4% year-over-year.
Stock Buyback Trends
As the below table shows, stock buybacks in the S&P 500 Index outnumber dividends by about double in 2022:
| Year | S&P 500 Stock Buybacks | S&P 500 Dividends |
|---|---|---|
| 2022* | $1.00T | $0.54T |
| 2021 | $0.88T | $0.51T |
| 2020 | $0.52T | $0.48T |
| 2019 | $0.73T | $0.49T |
| 2018 | $0.81T | $0.46T |
Source: S&P Dow Jones Indices (Sep 2022). *For the 12-months ending June 2022.
However, stock buybacks fluctuate more often than dividends since corporations can turn them on or off. For example, in 2020, buybacks sharply declined given growing financial uncertainty. Meanwhile, companies issued dividends at a steady pace.
In this way, when share prices decline, buybacks typically decrease.
Yet unlike the last two recessions in 2008 and 2020, buybacks have shown notable strength in 2022 in spite of falling share prices.
What Are the Top Sectors for Stock Buybacks?
We can see in the table below that the biggest share repurchasers are in the tech sector, with $2.1 trillion in buybacks since 2009.
| Sector | Cumulative Buybacks Since 2009 | Q2 Buybacks |
|---|---|---|
| Information Technology | $2,060.4B | $72.0B |
| Financials | $1,265.0B | $21.2B |
| Consumer Discretionary | $941.7B | $27.6B |
| Health Care | $929.1B | $17.2B |
| Industrials | $717.6B | $17.4B |
| Consumer Staples | $548.1B | $10.7B |
| Communication Services | $369.6B | $29.4B |
| Energy | $337.9B | $13.4B |
| Materials | $187.0B | $8.7B |
| Utilities | $26.8B | $0.5B |
| Real Estate | $16.9B | $1.1B |
| Total | $7,382.6B | $219.6B |
Source: Yardeni Research (Nov 2022). Represents stock buybacks for S&P 500 Index sectors.
On the other hand, utilities and other capital-intensive sectors tend to spend less on buybacks in contrast to asset-light sectors such as tech and financials.
What is also characteristic to share buybacks is their concentration. As we have seen in the second quarter this year, the top 20% of buybacks make up 47% of all repurchases across the S&P 500 Index.
New Tax On Stock Buybacks
Stock buybacks have drawn criticism for using cash to benefit shareholders instead of boosting production or improving the quality of the business.
In response, beginning in 2023, the Inflation Reduction Act puts a 1% excise tax on buybacks.
What this means is that public companies based in the U.S. must now pay a 1% tax on share repurchases, which could result in millions of additional expenses. Given this new tax rule, corporations may be accelerating buybacks ahead of year-end.
Implications for Investors
As stock buybacks have grown in prominence, it’s worth noting that not all are equal.
When a buyback aligns with a company’s long-term plan, and the company can cover their operational expenses, it can support the stability and growth of the company. When stock prices are volatile, companies can repurchase shares when they are undervalued.
By contrast, if a company takes on excess leverage in order to buyback shares, it can contribute to lower financial resilience. When a company uses a buyback to opportunistically repurchase shares, the boost in share prices may be short-lived.
In addition, it could also prevent capital from being directed to growth initiatives. In this way, it’s important to consider stock buybacks on a case-by-case basis.
With this in mind, investors can look to companies with healthy balance sheets that can weather economic storms. Here, companies that illustrate price discipline and buy back shares at a discount may help build long-term value, providing benefits to investors who stay the course.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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