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FORTUNE.COM // JUNE.1.19
Winners and Losers
in a $1 Trillion
Buyback Year
Corporate America may be overpaying its
own shareholders. By Matt Heimer
INVESTING AMERICAN BUSINESSES have been
buying back their own stock at a
wallet-scorching pace. In the five years through
2018, encouraged by solid profits and changes in
the tax code, S&P 500 companies repurchased
about $2.9 trillion in stock. And last year, overall
U.S. buybacks topped $1 trillion in a single year for
the first time ever.
Buybacks theoretically help both shareholders—
by giving them cash to spend or invest elsewhere—
and the companies themselves—by taking shares
off the market and reducing the cost of paying
dividends. But with stock valuations near historic
highs, some investors are asking: Are companies
paying too much for their own shares?
More often than not, the answer is yes. Fortuna
Advisors, a financial-strategy consulting firm,
estimates that over
the past five years,
64% of S&P 500
companies that
carried out big
repurchase plans had
“negative buyback
effectiveness,” buy-
ing their shares at
relatively high prices.
Fortuna CEO Greg
Milano notes that
management often
spends more lavishly
on buybacks when
business cycles, and
thus stock prices, are
peaking; that can
shortchange remain-
ing shareholders by
squandering money
that could have been
invested back into
the company.
Fortuna studied
what might have hap-
pened if companies
had used a “flat strat-
egy,” spending equal
amounts on share
repurchases every
quarter rather than
spending more in
flush times. Over the
past five years, it esti-
mates, flat buybacks
would have saved
S&P 500 companies
$125 billion. Not
all companies were
bad market timers,
however: Defense
contractor Northrop
Grumman, drug-
maker Allergan, and
FedEx were among
a small handful that
each saved more than
$1 billion over the
years by buying low.
For more on
buyback strategy,
see fortune.com.TOTAL RETURN
EQUAL WEIGHTED
S&P 500
INDEX
BARCLAYS
FORTUNE 500
997%
637%
TOTAL RETURN
4/29/1996 TO 5/9/2019
S&P 500
INDEX
BARCLAYS
FORTUNE 500
579% 654%
IN ANY given year,
around 330 compa-
nies are included in
both the S&P 500
index of large-cap
U.S. stocks and the
Fortune 500. But the
differences between
the lists matter in the
market. Since 1996,
publicly traded For-
tune 500 companies
have outperformed
the S&P by 0.5
percentage points
annually, according
to Barclays, and using
an “equal weighting”
strategy, Fortune out-
performed by almost
two points a year.
While the S&P 500
often includes stocks
of popular but un-
proven businesses, a
company can’t crack
the Fortune 500 until
it earns significant
revenue; that explains
much of the perfor-
mance gap. Coming
soon: products to help
investors profit from
that advantage. —M.H.THE “500”
INVESTORS
SHOULD ACTUALLY
CARE ABOUT
KEEPIN’ IT 500
Defense giant Northrop Grumman timed its
buybacks well; most other companies didn’t.