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Is Nvidia’s stock buyback plan a sign of a key theme that could help drive the stock market?
The chip maker on Wednesday announced plans to buy back $25 billion in stock when it posted blow-out earnings results. The goal looks achievable, too: Nvidia (ticker: NVDA) in the July quarter bought back almost $3.3 billion of stock, just over half of its free cash flow. Analysts now expect $34.4 billion in cash flow next year—so if the company plans to return more than half of that in buybacks, repurchases would total close to $20 billion.
Buybacks can often be a key ingredient to stock market returns for investors. Some shareholders receive cash buy their selling shares back to the company, while others enjoy higher earnings per share because there are fewer shares outstanding.
Nvidia is aggressively growing its profits, enabling it to return so much money to stockholders. To be sure, most companies’ growth won’t be as spectacular as Nvidia’s—but if they can see earnings growth after what’s been a rocky 2023, buybacks should rise across the board, too.
In the first half of the year, companies on the S&P 500 repurchased just over $400 billion of stock, according to Citi, so they’re currently on pace to return just over $800 billion in 2023. That would be down about 11% year-over-year.
That’s not a surprise, with
S&P 500
aggregate net income in the first two quarters of the year having fallen roughly 5%, according to Credit Suisse. Higher interest rates are starting to hit companies’ sales. Revenue for the index was almost flat year-over-year for the first half, while companies have had to contend with higher costs, like rising wages and salaries—lowering profit margins and hitting bottom lines.
Investors and companies alike should prepare for some tailwinds: Many economists believe the Federal Reserve’s work to raise interest rates and hurt demand is almost over since the rate of inflation has declined. Analysts expect aggregate free cash flow per share for S&P 500 to rise about 12% in 2024—a number that starts with sales and profit growth and is aided by stock buybacks.
For buybacks, “this year’s pullback is not a concern,” writes Citi strategist Scott Chronert. “We anticipate a positive inflection in free cash flow growth for the S&P 500 headed into 2024.”
Soon enough, profits and buybacks should roll in. That’s always a help to the stock market.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com