Stock Market Selloff Sent Major Companies to Market

While the concept of a company buying its own shares back might seem redundant, recent market activities show that there can be major benefits to the process.

For starters, let’s break down what a share buyback is: simply put, it’s when a company repurchases its own shares from the market. This is done primarily to reduce a firm’s outstanding shares and, in turn, heighten the market value of its existing shares.

February saw a huge surge in stock buybacks in the American market — $113.4 billion worth to be exact. The increase came after the recent stock market correction, which has been attributed to a number of factors, including an increase in average hourly earnings in late January, along with high company valuations and the US Federal Reserve’s decision not increase interest rates. 

The US stock market reacted to the correction dramatically, with the Dow Jones Industrial Average (INDEXDJX:.DJI) dropping almost 1,200 points the Monday after those events. That, along with an additional 1,000-point drop three days later, sent traders and investors into a frenzy as they tried to cut their losses in US stocks.

Though the market is still recovering from that correction, some major companies took lemons and made lemonade with stock buybacks. Many were able to repurchase their suddenly undervalued shares at cheaper rates. This also gave companies the opportunity to cheaply invest in other corporations.

According to CNBC, Goldman Sachs (NYSE:GS) sees buybacks increasing 23 percent in 2018 overall, reaching $650 million. The firm also predicts that dividends will rise 12 percent to US$515 billion in 2018, while mergers and acquisitions will flourish by 16 percent to US$360 billion. Capital expenditures are expected to follow suit with an 11-percent increase to $690 billion.

In the mining industry, Goldman’s prediction of rising dividends is already beginning to show some truth, as some of the sector’s biggest companies have recently opted to share their wealth through some grand gestures. Earlier this month, Glencore (LSE:GLEN) gave shareholders a US$2.9-billion payout, nearly tripling its dividend. Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) also recently promised a full-year dividend of US$5.2 billion with an additional share buyback of US$1 billion.

If Goldman’s expectations continue to prove true, 2018 could be a big year for companies to effectively invest back in themselves as well as in their shareholders. “Firms investing the most for future growth should outperform in the current economic environment,” CNBC quotes David Kostin, chief US equity strategist at the firm, as saying.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.