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Business

Buybacks Hit Record After Pulling Back in 2020

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Stock buybacks are back.

Companies in the S&P 500 repurchased $234.5 billion in shares during the third quarter, topping the previous record of $223 billion in the fourth quarter of 2018, according to preliminary data from S&P Dow Jones Indices. The wave of share repurchases has helped propel U.S. stock indexes to dozens of records in 2021. The S&P 500 is up 25% this year, notching 67 record closes.

More buybacks are coming. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said he projects that S&P 500 buybacks will reach $236 billion in the fourth quarter.

S&P 500 component

Microsoft Corp.

said in September that its board had approved a plan to repurchase up to $60 billion of its stock. Car-rental company

Hertz Global Holdings Inc.

recently said it would buy back as much as $2 billion of its stock, while tech company

Dell Technologies Inc.

is planning a $5 billion share-repurchase program. 

Buybacks are just one of the forces behind the stock market’s rally. Asset prices have continued to benefit from the monetary and fiscal support that policy makers put in place to help the economy get through the pandemic. And analysts have consistently underestimated corporate earnings, which are expected to grow 45% in 2021 for companies in the S&P 500. 

Investors this week will scrutinize signals out of the Federal Reserve’s two-day policy meeting, where officials may accelerate the process of winding down a bond-buying stimulus program. Central-bank officials could also shed more light on their expectations for interest-rate increases next year.

Microsoft has approved the repurchase of up to $60 billion of its stock. Its HoloLens headset.



Photo:

Thanassis Stavrakis/Associated Press

S&P 500 buybacks plunged from nearly $199 billion in the first quarter of 2020 to just under $89 billion in the second, as companies reeling from the onset of the pandemic moved to conserve cash. Share repurchases increased in each following quarter, approaching $199 billion again in the second quarter of 2021.

Repurchases can support stocks by reducing a company’s share count, boosting its per-share profits. And they can boost investor sentiment by suggesting executives are optimistic about their companies’ prospects and confident in their financial position.

“It’s always comforting to have a management team come in and tell you how undervalued they think their shares are,” said

Anne Wickland,

a portfolio manager at Easterly Investment Partners. “It’s a vote of confidence in the longer-term outlook.” 

Her team bought shares of

Lockheed Martin Corp.

in the summer, in part because of the defense company’s share-buyback program and dividend yield. Lockheed shares fell 12% on Oct. 26 after the company reported lower-than-expected quarterly sales and revised its full-year sales forecast lower. Ms. Wickland said she believes the shares are undervalued and continues to like them.

Stock buybacks have come under fire from politicians who say companies should use cash to invest in their businesses instead of supporting their share prices. The version of the $2 trillion education, healthcare and climate spending package that passed the House in November would ​​create a 1% tax on the net value of a company’s stock buybacks. 

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The Senate hasn’t voted yet, but the buyback tax has so far generated less corporate opposition than the bill’s other tax increases. Strategists at BofA Global Research project that the proposed tax would result in a 0.3% reduction to S&P 500 per-share earnings, assuming that companies didn’t change the amount of stock they repurchase. 

Several investors said they don’t believe the tax would have much of an effect on companies’ behavior if it became law. “The 1% tax on buybacks is so low that I don’t think it will impact anything,” said

Olivier Sarfati,

head of equities at wealth-management firm GenTrust.

Write to Karen Langley at karen.langley@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Hewlett Packard Enterprise Stock Tumbles. Why Goldman Sachs Says Sell.

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Dreamstime

Shares of


Hewlett Packard Enterprise

dropped Friday after receiving a downgrade to Sell from a Goldman Sachs analyst, who cited weakening spending environment for U.S. information technology.

Analyst Rod Hall downgraded the IT hardware and software company’s stock to Sell from Neutral and cut his price target to $14 from $16.

Shares of Hewlett Packard Enterprise (ticker:


HPE

) declined 7.4% to $14.76 on Friday.

Hall’s predictive model suggested that the IT spending environment will weaken by late 2021 or early 2022, spurring the downgrade. Goldman’s spending predictive index for October was +1.1, well below record highs of +4 and +5 from April to June this year, he said.

The analyst also was wary of declining prices for DRAM memory storage, which were down 4% in October. Lower DRAM prices could result in lower prices for servers that could harm volume demand, Hall said.

For Hall, HP Enterprise was “expensive” compared with competitors. The stock was trading at 11 times the next 12 months’ cash flow, compared with


Dell

(


DELL

) trading at 7 times the company’s cash flow with the potential to regain market share in the near future.

“Overall, we see both Dell and


Cisco

(


CSCO

) as better options for investors within our enterprise IT hardware coverage,” Hall wrote.

There could still be an upside for HP Enterprise. Hall noted that the company’s “substantial” backlog could “offset some of these headwinds in the near term.”

In late October, HP Enterprise gave upbeat guidance for fiscal 2022 and the next three-year period, telling analysts the company was expecting 2022 fiscal revenue growth of 3% to 4% in constant currency.

The stock has generally outperformed the market this week, including outperforming some of its competitors. The stock has gained nearly 40% this year.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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Business

Here’s what the Fed will do — if it follows what Powell said at last year’s Jackson Hole address

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Get out your popcorn, and get your trading apps open — after months in the waiting, Federal Reserve Chair Jerome Powell is set to deliver remarks on the economic outlook at the Kansas City Fed’s Jackson Hole economic symposium.

Expect him to inch up to the line, but not quite announce, that the Fed will end its bond-buying program. The delta variant has supressed progress on a number of economic indicators, ranging from airline travel to purchasing manager gauges of activity, so Powell will have reason to say, let’s wait for another month or two of data before committing to a taper.

But there’s another reason why the Fed should wait — the framework that Powell himself introduced at last year’s Jackson Hole, called average inflation targeting. “We will seek to achieve inflation that averages 2% over time. Therefore, following periods when inflation has been running below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time,” he said in 2020.

Now Powell didn’t actually define the “time” element. If time means three years, inflation is still below target, as the chart shows. “It is needless to say that the hurdle rate for rate hikes due to inflation is extremely high under the new Fed framework and that this year’s US treasury rates move was unwarranted,” said Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel Asset Management.

Bettaieb-Loriot may not be correct in his call that tapering’s unlikely before well into 2022; after all, during the July meeting in which “most” Fed officials said it would make sense to start reducing purchases, the 3-year rolling average of inflation was below target. Put another way, the Fed’s commitment to its new framework has been shaky. It will be interesting to see whether Powell makes a fresh commitment to it, or not.

The buzz

The Powell speech is due at 10 a.m. Eastern, and a gaggle of other policymakers will be interviewed on the major business news networks through the day. Ahead of that, there’s data on the PCE price index for July, as well as trade in goods data from July.

There were a number of corporate earnings releases delivered late Thursday. Gap
GPS,
-4.11%
surged as the retailer’s earnings came in well ahead of estimates, with online sales now representing a third of total revenue. Peloton Interactive
PTON,
-1.86%
shares slumped on the exercise bike company’s outlook and price cuts. Enterprise software provider VMware
VMW,
+0.20%
also slumped after its latest results.

The two U.S. major makers of personal computers, HP
HPQ,
-0.99%
and Dell
DELL,
-0.50%,
also reported results, with HP missing estimates on sales. Read: The PC boom is wobbly as the most important time of year approaches

Apple
AAPL,
-0.55%
will allow app makers to direct consumer payments outside of its App Store, a response to a number of antitrust lawsuits against it.

Microsoft
MSFT,
-0.97%
has warned thousands of its cloud customers that their databases may have been exposed to intruders, according to an email obtained by Reuters.

Tesla
TSLA,
-1.41%
is trying to sell electricity directly to consumers in Texas, according to Texas Monthly.

China plans to ban U.S. initial public offerings for data-heavy tech firms, The Wall Street Journal reported.

Evacuations resumed in Afghanistan after the deadly bombings in Kabul.

The markets

U.S. stock futures
ES00,
+0.26%

YM00,
+0.20%
nudged higher ahead of the Powell speech. The yield on the 10-year Treasury
TMUBMUSD10Y,
1.345%
slipped to 1.34%.

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Business

Companies Thought They Had a Plan for Fall. Now They Are Scrapping It

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Up until a few weeks ago, corporate leaders felt confident about what to expect this fall.

Offices would reopen after Labor Day. Business travel would resume more broadly. Long-delayed work gatherings, conventions and off-site meetings would finally take place.

The pandemic has, once again, upended many of those plans.

The swift, startling resurgence of Covid-19 cases and hospitalizations across the U.S. is causing corporate leaders to rip up playbooks for the next few months.

No longer is a September return a target for many companies. Some employers, such as banking giant Wells Fargo & Co. and managed-care company Centene Corp. , have in recent days shifted return-to-office dates to October. Meanwhile, a range of other prominent companies now predict it will be 2022 until most workers return.

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