Earnings and buybacks have long maintained a close relationship, with net income being a reliable leading indicator for share repurchases.
Earnings growth had been robust in recent years, reaching the second highest level ever in Q4’19 before dropping sharply in 2020. Quarterly share buybacks and reported earnings have a strong correlation, particularly with a quarter lag, indicating that earnings have historically been a reliable leading indicator of buyback volumes. In Q1, earnings fell dramatically while dividends and buybacks held steady until Q2, leading to a shareholder payout of ~200% of earnings.
With earnings having rebounded significantly since Q1, the payout ratio of buyback and dividends to earnings dropped below 100% again.
Earnings and Buybacks Correlation:
- Same Quarter: 0.76
- 1 Quarter Earnings Lag: 0.81
- 2 Quarter Earnings Lag: 0.84
Data sources: S&P Dow Jones Indices, Guzman & Co.
In Q3’19, buybacks represented 62% of reported earnings in the S&P 500 while dividends represented 44%. Since 2009, buybacks and dividends have on average represented 57% and 40% of earnings, respectively.
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