Wednesday, June 06, 2018

Capitalist Boom-Times

Money is pouring into the U.S. economy. If current conditions persist, corporations are likely this year to inject more than $2.5 trillion into what UBS strategists term "flow" — the combination of share buybacks, dividends, and mergers and acquisitions activity.

The development comes as companies find themselves awash in cash, thanks primarily to years of stashing away profits plus the benefits of a $1.5 trillion tax break this year that slashed corporate rates and encouraged firms to bring back money idling overseas. Companies have nearly $2.5 trillion in cash parked domestically, according to the Federal Reserve, and as much as $3.5 trillion overseas, various estimates have shown.

For 2018, UBS expects dividend issuance to top $500 billion, buybacks to range from $700 billion to $800 billion, and M&A to constitute about $1.3 trillion. If the numbers pan out, they would equate to about 10 percent of the S&P 500's market cap and 12.5 percent of GDP.

Buybacks specifically have been on a torrid pace. Repurchases are up 83 percent year to date, far ahead of the 9 percent gain in dividends, while M&A activity involving U.S. companies has surged 130 percent, according to UBS.

The Nasdaq, which is heavily weighted to tech, is up about 9.5 percent year to date, easily topping the other major averages. Led by Apple's $100 billion, announced buybacks have jumped $160 billion in 2018, an increase of more than 200 percent from 2017. In addition to skewing toward tech, buybacks also have been heavily tilted toward growth stocks, which have seen $280 billion in activity, compared with value's $90 billion.

UBS estimates that the combination of buybacks, dividends and demand flows account for some 40 percent in performance this year. The market has had its best May since 2009, according to Bank of America Merrill Lynch. May was a particularly active month for repurchases, with a record $171.3 billion in announcements, spurred by Apple. The gains came amid a big liquidity surge and improving economic fundamentals. The biggest companies were the biggest repurchasers, with the top 20 percent of firms by market cap accounting for 72 percent of buybacks in the first quarter.

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