Stock Buybacks Are Peaking. Dividend Lovers, Get Ready.

Companies’ share buybacks are slowing. BofA Securities forecasts a growing demand for inflation-protected income via stocks. (Michael M. Santiago/Getty Images)

Large companies might finally be slowing down share repurchases. It’s another sign that the stock market has grown overvalued—but it’s also potentially good news for investors who love dividends.

For much of the past year, companies have been buying back their own shares at a torrid pace. Companies in the S&P 500 spent nearly $1 trillion on share repurchases in the 12 months that ended in March, according to S&P Global.

More recently the pace has begun to slow, according to a report published on Tuesday by BofA Securities. BofA analysts looked at annual S&P 500 share buybacks as a percentage of the market’s overall market capitalization. The annual pace of buybacks, measured on a 12-month trailing basis, peaked at about 0.4% of overall market cap earlier this year, and has since fallen back to about 0.35%. That pace remains historically high, but about equal to the pace at the start of 2024.

“Have buybacks finally peaked?” asked BofA analysts Jill Carey Hall and Tyson Dennis-Sharma, weighing the data. “Elevated rates/valuations may finally be having some impact.”

Indeed, while market watchers have been warning about the S&P 500’s valuation for years, it has recently reached even more extreme levels. The S&P 500’s forward price-to-earnings ratio fell to as low as 18 in early April, when trade-war anxiety peaked; it recently surged to 22.4, according to FactSet, one of its highest levels in the past 20 years.

In addition to higher prices, political uncertainty might also be giving companies pause. While plenty of companies are still buying back shares to cover the cost of employee option grants, fewer executives may be inclined to splash out simply to boost earning per share.

“For the second quarter, given the market turmoil, volatility and uncertainty, buybacks appeared to be limited to those issues with secure cash-flows,” wrote S&P Dow Jones Indices analyst Howard Silverblatt last month.

In the long run, buybacks’ loss might be dividends’ gain, predicts BofA Securities.

While the S&P 500’s dividend payout ratio—the share of earnings spent on dividends—is historically around 50%, it has fallen since 2020 into the low 30s. Culprits include executives who want to goose earnings per share with buybacks and years of ultralow interest rates, which have made the prospect of cash payouts attractive to many investors.

That could change, BofA argues, especially with growing numbers of retired baby boomers hungry for income investments that can keep pace with inflation, as stocks tend to do.

“With aging demographics and sticky inflation risks, the supply/demand argument for inflation-protected income via stocks is, in our view, compelling and bullish,” wrote a team of BofA analysts led by Savita Subramanian in a separate note earlier this month.

S&P 500 companies paid dividends amounting to $165 billion in the second quarter, up about 7.7% from the second quarter of 2024, according to S&P Global. That puts them on pace to pay out a total of about $660 billion for 2025. S&P Global forecasts large-cap companies will increase total dividend payouts by about 6% this year, which would set a new record.

Write to Ian Salisbury at ian.salisbury@barrons.com