One of the quieter engines of the decade-long bull market has been the rise of stock buybacks. U.S. companies have spent trillions of dollars to repurchase shares in the past decade, returning cash to shareholders and often providing a welcome tailwind for their stock performances.
Between early 2011 and the end of 2018, companies in the S&P 500 saw net aggregate repurchases of $3.5 trillion, according to Ned Davis Research. After averaging around $500 billion a year for a few years, stock buybacks surged to $806 billion last year.
During the first half of 2019, the pace of buyouts picked up yet more steam as U.S. stock indexes charged to record highs. In July, analysts predicted yet another record year for stock buybacks, with Goldman Sachs forecasting that companies would buy back $940 billion and Bank of America Merrill Lynch upping its forecast to more than $1 trillion.
But something has changed since this summer. Corporate executives, who should have a deeper insight into their company’s prospects than most investors, have grown less sanguine about their business outlooks. And that could lead them to apply the brakes to aggressive share repurchasing plans for a while.
By some measures, things still look bright for U.S. stocks. Many companies are reporting strong earnings this month, despite previous concerns that the third-quarter earnings season could disappoint. Trade tensions appear to be easing somewhat, at least for now. And consumer confidence remains upbeat heading into the holiday season.
Corporate confidence, however, is a different matter. CEO confidence is at its lowest point since the first quarter of 2009, the heart of the Great Recession. The Conference Board’s measure of CEO confidence plunged to 34 in the third quarter from 43 only three months earlier. The reading during the depths of the Great Recession was only slightly lower, at 30.
What’s more, a survey of CEOs by the Conference Board’s showed only 4% expect the economy to improve in the next 6 months, while two in three see it worsening.
That echoes a separate survey last month by Duke University of chief financial offers, who control the corporate purse strings. It showed 55% of CFOs grew more pessimistic about the economy last quarter, far outnumbering the 12% who said they have become more optimistic. Duke noted the survey “has been an accurate predictor of hiring and GDP growth.”
It could also presage a decline in stock buybacks. Companies repurchase shares for a number of reasons. Buybacks can reduce the number of outstanding shares. The fewer shares on the market, the greater the ownership stake of each remaining share.
Stock buybacks are sometimes called dividends in disguise because they provide a way of returning money to shareholders. During harder times, companies are often reluctant to slash dividends because it can prompt investors to sell off their shares. That’s less common with buybacks, making them a more flexible option.
Buybacks also provide a company with the opportunity to buy its own shares when executives and board members believe the market is unfairly discounting the stock. Not only can a buyback program signal to investors that a company is confident about its future, it can also push up earnings per share by reducing the overall number of shares available for purchase. In theory, even if a company’s net income falls, its EPS could still rise if enough shares are bought back.
Years of low interest rates in the wake of the last recession have helped fuel the surge in buyback activity, as did the cuts in corporate taxes that came in 2018. More than half of stock repurchases last year were funded by borrowed money. According to Goldman, companies are now returning more cash to shareholders then they generate in free cash flow.
Given all that, the surge in buybacks has led to concerns things are getting out of hand. Critics of the practice argue that they draw capital away from hiring and research and development efforts, benefiting shareholders at the expense of new potential workers.
Wall Street often cheers ambitious buyback plans, but the end result can ultimately harm a company’s bottom line for years to come if executed poorly. Take General Electric, which spent $53.9 billion to repurchase 2.07 billion shares in the decade ending in 2017, at average prices of $26. Considering the GE share price has traded well below this level for years, the elevated price tag on all those acquired shares resulted in a staggering “destruction of capital,” some investigative accountants say, as it could have used that capital elsewhere to shore up its business operations.
At any event, some in Congress, Democrats and Republicans alike, are pushing for new laws to restrict stock buybacks in a number of ways.
It’s far from clear that such restrictions on buybacks will curb any excesses, however. For one thing, research indicates that companies that give more money back to shareholders tend to see higher subsequent earnings growth. For another, the chill being felt in many executive suites about the economic outlook could be more effective in slowing down stock buybacks.
After all, many stocks are trading near record highs just as their leaders are bracing for a downturn. No one wants to be the fool buying a company’s stock right before it peaks. Least of all the people running that company.
More must-read stories from Fortune:
—The world’s biggest lighting company makes promises for a WiFi alternative—but 5G awaits
—As U.K. turns its back on the EU, Georgia desperately wants in
—A.I. regulation is coming soon. Here’s what the future may hold
—How a Chinese developer at Tencent is shaping the future of gaming
—Gojek’s founder resigned to join the Indonesian government. What’s next for the $10 billion startup?
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.
