A Foolish Take: Have Stock Buybacks Maxed Out?

Stock buybacks have become one of the most controversial issues in the investing world recently. Proponents of share repurchases see them as a tax-efficient way for companies to return excess capital to shareholders, but opponents argue that companies should use their financial resources in more productive ways.

Regardless of which end of the debate you're on, there's no dispute that 2018 was a banner year for buybacks. The amount of money spent on share repurchases set quarterly records for all four quarters in 2018, with buybacks among S&P 500 companies in the fourth quarter of 2018 coming in at $223 billion. That number's up 63% from where it was in the fourth quarter of 2017, and for the full year, companies in the S&P 500 spent more than $800 billion on buybacks -- up from less than $600 billion the year earlier.

Meanwhile, companies didn't seem to use dividends as a way to return capital to any greater extent during 2018 than they had in previous years. S&P 500 constituents on the whole have been increasing their dividend payments gradually over time, but last year's number seemed only to continue that upward trend rather than producing an outlying result.

Peak buyback?

There are a couple of reasons to think that 2019 might not be quite as strong a year for buybacks as 2019 was. First, the passage of the tax reform package created some one-time opportunities for many companies to repatriate cash that they had previously held overseas to defer paying tax on international profits. By freeing up that cash, new tax laws resulted in substantial boosts to buyback activity, especially among major tech companies. The biggest buyer of stock was Apple, which spent more than $74 billion on repurchases during 2018.

Second, politicians have started to target buyback activity. Some lawmakers have gone so far as to consider outlawing the practice entirely, while others have made less aggressive moves that would rein in the tax advantages of share repurchases. With Washington divided, it's unlikely that lawmakers would reach consensus on a ban or other limitation, but companies might well decide to try to get out of the spotlight on their own.

For investors, stock buybacks have reduced outstanding share counts and helped boost key financial metrics like earnings per share. If buyback activity slows, shareholders might well notice its absence on the bottom line.

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Dan Caplinger owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: short January 2020 $155 calls on AAPL and long January 2020 $150 calls on AAPL. The Motley Fool has a disclosure policy.