One of the oddities of the modern US stock market is its strong predilection for share buybacks. Rather than finding profitable outlets for their cash holdings by investing internally, corporations have taken to shrugging their shoulders and simply handing the stuff back en masse.
The idea of shrinking the number of shares outstanding has acquired its own momentum, and buybacks have become an important driver of stock market performance. In recent years members of the S&P 500 have increased their spending on their own stock, last year retiring 4 per cent of the index’s capitalisation. That is equivalent to $800bn.
Those buying back are not only mature companies, whose need for investment might be lower. They include growth stocks such as tech companies and those with big investment needs including pharmaceuticals and defence. Indeed, one of the heftier spenders of recent years has been aerospace giant Boeing.
The company might seem an odd candidate for a big buyback programme. Its civil aviation business involves huge multiyear projects in which billions of dollars of capital are put at risk. The programme for the 787 Dreamliner, for instance, lasted eight years and cost $32bn.
Yet Boeing has found the financial space to splurge on its own stock. Between 2013 and the end of the first quarter of this year, it retired a net 200m shares, handing back $43bn to holders. The number outstanding came down by 25 per cent.
One reason it could was because of savings on the company’s latest aircraft programme, the now notorious 737 Max, grounded after two recent crashes killed 346 people. Instead of building a wholly new aircraft, Boeing simply bolted new fuel-efficient engines on to a tweaked existing airframe. That significantly reduced the airframe development costs of the project, according to company insiders. Boeing was able to redirect some of those “savings” to repurchase stock instead.
It illustrates a choice that many chief executives have willingly made: to prioritise buybacks over investment. In this, they have received little but encouragement from their financial backers.