Buybacks have been keeping stocks strong for years — but the gig might soon be up for these 10 companies

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Stock buybacks have been a key contributor to the market’s strength throughout the 10-year bull market, helping share prices appreciate during periods devoid of other positive catalysts.
Dennis DeBusschere of Evercore ISI says he’s identified 10 companies that might have to cut back on their repurchase spending, leaving their stocks vulnerable.
DeBusschere is focused on companies that have spent a lot on buybacks recently, but which also have a lot of debt and weakening profitability — both signs they might not be able to spend as much in the future.
His warning comes as stock repurchases decline a bit after setting all-time highs in 2018.
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Some companies are going to have to say bye-bye to buybacks. Or at least they’ll have to cut back.

Throughout the 10-year bull market, companies have spent huge amounts of money buying back their own stock, boosting their share prices in the process. That includes a record $806 billion in repurchases last year, a figure that was boosted by the Tax Cuts and Jobs Act, and that has slipped a bit in 2019.

While buybacks have drawn some criticism from politicians, they’ve also become a critical source of support for the market and for individual companies. Evercore ISI macro research analyst Dennis DeBusschere says he’s identified a group of companies that might dramatically reduce their repurchases, leaving their stocks vulnerable.

"Stocks with the least sustainable buyback activity have underperformed so far in 2019, a trend we expect will continue over the coming quarters," he writes.

What makes buybacks unsustainable? Large amounts of buyback spending combined with rising debt and weakening profitability, he says.

If some companies have to pare their repurchase spending, then buybacks will become even more concentrated among just a few companies. DeBusschere says that around 75 companies are responsible for 80% of the buyback spending on the S&P 500. Most of that comes from tech giants, especially Apple.

The good news, in his view, is that those companies probably won’t stop buying back large amounts of stock unless there’s a recession. That’s going to support market valuations generally even if a select number of companies run into trouble after reducing their spending.

In order to identify which stocks are most at risk, Evercore screened for companies with more than $100 million in trailing buybacks that increased debt more than $100 million over one- and three-year periods. From there, the firm ranked them based on: cash/repurchase ratio, return on invested capital, and ROIC change.

That’s all baked into a so-called "vulnerability score." Below are the 10 stocks with the highest scores, listed in increasing order: