Dividends and buybacks are recovering.
Towards the end of the first quarter, there were tremendous concerns that dividend and buyback levels could be drastically reduced.
There have been cuts, but there is good news amid the bad.
The good and bad news about dividends
For dividend lovers, the end of the first quarter and the beginning of the second quarter looked pretty bad. 42 companies in the S&P 500 – nearly 10% – have suspended their dividends entirely and 25 have cut them, some significantly.
"That was unprecedented," said Howard Silverblatt of S&P Dow Jones Indices. "No company has suspended its dividend in 2018 or 2019."
But when the economy opened up again, things started to turn around. Five of the 42 companies that suspended their dividends have at least partially reinstated their dividends.
Even as some companies reintroduced their dividends, many more continued their years of activity: increasing dividends.
A total of 216 companies increased their dividends this year.
Bottom Line: Silverblatt estimates the S&P 500 will pay dividends of $ 479.1 billion in 2020, just 1.3% below the $ 485.5 billion paid out in 2019, which was a record year .
The bad news: The S&P only yields 1.6%, one of the lowest dividend yields in decades.
Buybacks rebounded from second quarter lows, but companies that issued far more stocks
The second quarter started badly as companies tried to maintain liquidity by reducing buybacks – big time. How large? S&P 500 companies bought back $ 199 billion of their own stock in the first quarter. In the second quarter, that number fell to $ 89 billion, a reduction of more than 50%, according to Goldman Sachs.
But then a funny thing happened. Just like earnings bottomed in the second quarter, buybacks also bottomed out.
Goldman estimates that it repurchased $ 112 billion in the third quarter, up 26% from the second quarter, and Goldman estimates that it will repurchase $ 125 billion in the fourth quarter.
That's the good news. The bad news: as gross buybacks are rising, companies are also issuing a lot more new stocks, according to Brian Reynolds, who tracks buybacks at Reynolds Strategy. The result: Net buybacks – how many buybacks increase or decrease the total number of shares – remained unchanged in the second quarter and are expected to remain unchanged for the rest of the year: "The average company reported a 0.1 increase in the number of shares this quarter % – compared to a 0.6% decrease in the number of stocks a year ago, "Reynolds said in a recent statement.
Increasing the number of stocks means that companies cannot rely on buybacks to increase their profits. Reynolds found that the S&P buyback index, which is made up of the 100 companies in the S&P that are most aggressively buying back their shares, has also shifted from decreasing to increasing their number of shares. Top positions in the index include MGM, Best Buy, Qualcomm, Kansas City Southern, Lennar, Cummins, and Xerox.
"A year ago, less than 20% of this group of companies increased their number of shares. Now it's 44%. That's a remarkable change," he said.
What does this all mean for investors? The S&P buyback index underperformed this year as investors laid off companies with high buybacks in 2019 for other parts of the market.
Reynolds concludes that it may be time for companies that can still aggressively buy back stocks to outperform: "From a dynamic point of view, the stocks of companies that can still buy back their stocks seem to be the point to approach where we would wish. " to buy them on weakness. "
Speaking of increasing buybacks, after the close of trading, Microsoft announced that buybacks in the third quarter increased dramatically from $ 5.8 billion in the second quarter to $ 6.74 billion.
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