U.S. corporations are on track to plow $2.5 trillion into the stock market and investor pockets in 2018 through share buybacks, dividends and mergers and acquisitions — and the tech sector, followed closely by health care, is leading the way, according to UBS.
The surge in so-called corporate flow (see chart below) is a tailwind for the stock market and comes as companies digest the corporate tax cuts signed into law last year and the incentives to bring home cash previously kept overseas for tax reasons.
In a Monday note, analysts led by Keith Parker said S&P 500
net buybacks were up 53% in the first quarter, while announced buybacks are up 83% so far in 2018. Dividends are up 9.6% year over year, and announced acquisitions of publicly listed U.S. companies are up around 130% so far in 2018.
Extrapolating from the pace so far, U.S. corporations are on track to deliver $700 billion to $800 billion in buybacks, $500 billion or more in dividends, and $1.3 trillion in M&A. The $2.5 trillion total is around 10% of current market capitalization, though the analysts noted that the pace could moderate after a torrid start. Still, the total so-called corporate flow is set to jump by $1 trillion, which would surpass previous peaks.
The analysts said the environment reaffirms their overweight position in health care and tech and also points to further outperformance for growth and momentum strategies “given such massive ‘flow’ to growth firms/funds and investors reinvesting the proceeds into stocks with strong fundamental momentum.”
Tech and health care together account for around 45% of the total corporate flow, the analysts said. Announced buybacks in the tech sector are up $160 billion, or 200%, in 2018 (with Apple Inc.
accounting for $100 billion). That accounts for more than 60% of S&P buyback announcements and nearly all the year-over-year increase, they said.
Announced buybacks for the health-care sector are also up over 200%, though M&A is running at a $500 billion annual pace for the sector, or 13% of market cap. The tech sector continues to lead the S&P 500, with a gain of more than 13% versus 2.7% for the broader index.
The tech-weighted Nasdaq Composite
was trading above its record close from March 12 on Monday and remained not far off its all-time high of 7,637.27.
Among other highlights, the financial and discretionary sectors are leading the way on year-over-year dividend growth at 16% and 13%, respectively.
Overall, seven of the S&P 500’s 11 sectors are seeing flow that exceeds 10% of market cap: health care, tech, energy, real estate, telecom, utilities and staples.