S&P 500 Dividends and Stock Buybacks Hit Record Levels

September 19, 2014

This week’s Chart of the Week examines increases in dividends and stock buybacks for companies within the S&P 500 index during the prior six years. Following a recession low of $71.8 billion during the second quarter of 2009, combined dividend and buyback expenditures established a record high of $241.2 billion in the first quarter of 2014. The previous record occurred during the third quarter of 2007 when companies spent a combined $233.2 billion on dividends and buybacks.

Stock buybacks reduce the amount of shares outstanding for a company which causes earnings per share (EPS) to increase since the same amount of earnings over fewer shares outstanding creates a higher EPS value. EPS is a metric used in the determination of stock price, so a higher EPS value provides support for the stock price to appreciate in the near term.

A significant source of funding for stock buybacks in recent years came from the ability to borrow at short-term rates near zero. As interest rates are set to eventually rise, companies will be less inclined to fund buybacks in this manner. Compared to dividends which typically don’t experience large changes from period to period, stock buybacks are more dynamic in nature and can be quickly reduced if needed. Going forward, a potential concern for future stock market returns is that if buybacks are scaled back significantly, returns will likely be adversely impacted by such a contraction in buybacks.