TOKYO -- The role of stock markets is shifting from a recipient of investor funds to a venue for rewarding shareholders. As corporations grow reluctant to make fresh investments, they have used ample cash to step up stock buybacks while reducing new share offerings.
The total value of stock buybacks over the past five years surpassed the amount of fundraising by roughly $1.8 trillion. The rise of information technology businesses since the early 2000s has changed the industrial structure, leaving many companies with excess funds.
According to data from QUICK-FactSet and other sources compiled by Nikkei, stock buybacks have consistently exceeded share offerings since 2001, except for brief periods after the global financial crisis. Companies are paying back more money to shareholders than they are raising in the markets.
Shareholder payouts have increased every year, with stock buybacks exceeding share issuance by nearly $720 billion in 2018.
Buybacks reached a record $1.32 trillion in 2018. In addition to U.S. tax cuts encouraging corporations to reward shareholders, the prolonged U.S.-China trade war has made them cautious about investments, prompting them to shift surplus money to shareholder payouts. Japanese companies have also repurchased their own stocks since the government pushed forward corporate governance reforms.
The buyback sprees have maintained momentum this year. Apple announced in April that it would repurchase an additional $75 billion of its own shares. The announcement comes less than a year after the U.S. tech company set up a $100 billion buyback quota in May 2018.
Microsoft also decided on a stock buyback of up to $40 billion in September.
With investors shifting money from stocks to bonds, share buybacks are expected to be the biggest supporter of stock markets, said Michael Hartnett, Bank of America Merrill Lynch's chief investment strategist.
Meanwhile, fundraising in the stock market has continued falling since a peak of $790 billion in 2014. In Japan, fundraising via stocks has fallen by 20% from its most recent peak in 2013.
Behind this trend is a structural change at companies. Capital spending has topped out as companies have reduced factory construction that requires large amounts of funds, leaving them with surplus funds. Shareholders are increasingly vocal about their opposition to capital increases, which would dilute their shares, and about their demands for the return of profits.
Another major reason for the decline in stock-fundraising is that promising startups have become able to raise funds from investment funds and other sources without going public.
In contrast with the sluggish issuance of shares, corporate bonds are issued at an all-time high rate of $2 trillion a year. Some companies can issue bonds at interest rates of almost 0%. There are many companies that buy back shares with funds raised by bonds.
In the U.S., a considerable amount of companies buy back shares even though they have liabilities in excess of assets. Of the roughly 230 companies excessive liabilities, nearly 80 have offered share buybacks.
Companies faced with a barrier to growth are more inclined to reward shareholders with short-term benefits, such as share repurchases, rather than invest in plans for uncertain future growth.
Stock markets traditionally have been a place to provide growth funds to companies. But against the backdrop of excess cash and the growth of markets for unlisted shares, their role has significantly shrunk. They are now at a crucial crossroads.