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Solid earnings growth will be a tailwind for shares repurchases, according to Goldman Sachs, which is boosting its buyback forecast for this year.
After seeing the second-biggest decline in S&P 500 (NYSEARCA:SPY) (IVV) (VOO) buybacks in 2023, Goldman now expects S&P 500 companies to repurchase $925B in stocks this year, up 13% year over year and higher than the initial forecast of 4% growth. Buybacks will rise 16% in 2025 to $1.075B in 2024, Goldman said.
“Earnings growth is the most significant driver of share repurchases at the index level, explaining about half of the year-to-year variation,” strategist Cormac Conners said. “We recently upgraded our EPS forecasts for 2024 ($241 EPS, 8% growth) and 2025 ($256, 6% growth) due to the improving economic growth environment and stronger than previously expected mega-cap tech margins and earnings.”
“Improvements in the broader macro environment since the fall, like the decline in Treasury yields (SHY) (IEI) (IEF) (TBT) (TLT), also help to inform our forecast upgrade,” Conners said.
“Although we expect Treasury yields will remain elevated, the start of Fed easing in the middle of this year should drive somewhat looser lending conditions by 2025,” he said.
Info Tech (XLK) and Communication Services (XLC) will be the primary drivers of index level buyback growth, according to Goldman. That will be partially offset by weakness in Energy (XLE) buybacks.
“The Magnificent 7 (AAPL) (AMZN) (GOOG) (META) (MSFT) (NVDA) (TSLA) are likely to drive a substantial portion of S&P 500 buyback growth,” Conners said. “Despite the group having grown net income by 43% in 2023, aggregate buybacks for the group fell 11%. The proportion of group’s net income paid out in buybacks in 2023 was the lowest since 2017 (58%), indicating the companies may have capacity to increase their buyback payout in 2024.”
“Even if the group’s buyback payout ratio does not rise, the rapid earnings growth expected by consensus in 2024 (19%) and 2025 (15%) should drive commensurate growth in repurchases,” he said. “Buyback authorizations for these stocks also point to robust growth. 4Q filings show the group is currently authorized to repurchase $215 billion in stock, 30% higher than the level authorized at the same time last year ($166 billion), led by META (+$30 bn yr/yr), NVDA (+$15 bn), and AAPL (+$12 bn).”
“Dividend initiations are one risk to buyback growth for the Magnificent 7,” Conners said.
“Three of the Magnificent 7 do not pay any dividend (GOOGL, AMZN, and TSLA). We recently found that large companies with stable earnings, high profit margins and cheap valuations are the most likely to initiate dividends. Using this framework, GOOGL and AMZN respectively rank as the 1st and 8th most likely Russell 3000 (IWV) stocks to initiate a dividend. We expect buybacks will remain the primary cash return strategy of the largest tech stocks due to their flexibility and tax efficiency.”
“However, the Magnificent 7 may shift their cash return strategies more in favor of dividends as their cash flows become increasingly stable and the companies seek to expand their investor bases,” he said.