“During periods of low growth and low interest rates, firms with the highest buybacks fail to provide investors with either the consistent yield of bond-like assets or the prospect of future growth,” Goldman said.
Additionally, the pace of buybacks seem to be slowing after repurchases by S&P 500 companies totaled $163 billion in the first quarter, the highest level since the third quarter of 2007. The rate at which buybacks are being issued declined by 18% in the second quarter year-over-year. Goldman argued that the increasingly high valuations have made it less attractive for companies to buy back their stocks.
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Citigroup Analysts have also warned of slowing company buybacks in the face of a slow rise in interest rates and potential turn in the credit cycle that would make it more expensive for companies to finance repurchases through leverage.
“Managers should focus on firms returning cash to shareholders via dividends,” Goldman added. “Low, albeit rising, interest rates, a recovery in dividend growth expectations, and modest economic growth should benefit this strategy in [the second half] 2016.”
For more information on buyback stocks, visit our buybacks category.
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