Why The Stock Buyback Craze Will Continue—Look At Trex’s Example

Buybacks have been all the rage in recent years, as companies support their stock prices by scarfing up shares. This has the effect of bolstering earnings per share because there are fewer shares to divide into the earnings. Will the repurchasing party keep rolling? Odds are it will, although uncertainty about the economy and the market could temper the pace a little, for a while.

The continuing longevity of buybacks is assured because, for many companies, buybacks are an ongoing strategy—because it is very effective at elevsting share prices. Take Trex, which makes composite decking. It bought 6.5 million of its common shares last year, for $395 million, and in May launched a new program to repurchase up to 10.8 million shares, constituting one-tenth of its shares outstanding. In this year’s second quarter, the company laid out $16 million for buybacks.

Since Trex’s May 4 announcement, the shares have vaulted 21%. Certainly, the stock’s advance is helped by the good financial results that Trex has posted, but it’s the solid financial performers that often buy in their own shares. They can afford to.

For S&P 500 companies, last year set an annual record for repurchases. They laid out $923 billion then. There may be signs of a deceleration in buyback volume, although the amounts likely will remain high on an historical basis. In 2023’s first quarter, repurchases totaled $215 billion, down 23% from the year-before quarter’s record $281 billion. Still, the January-March 2023 total was higher than any prior point, except for a brief spell in 2018.

Tellingly, the upward movement of buybacks has come despite a 1% federal tax on them, as part of the 2022 Inflation Reduction Act. Standard & Poor’s estimates that the levy shaved 0.49% off first-quarter 2023 earnings. Notice, however, that enthusiasm for buybacks remains intact. While President Joe Biden called for increasing the tax to 4%, in his January State of the Union address, the idea has generated little traction in Congress.

Biden’s argument is that buybacks siphon off capital that would be put to better use building new factories, expanding businesses and enhancing worker pay. Trouble is, capital spending has gone up for nine straight quarters, through June 30, by Bank of America’s
BAC
measure. Warren Buffett, the great market sage, has termed a buyback detractor (perhaps thinking of Biden) either an “economic illiterate or a silver-tongued demagogue.”

Buffett’s approval of stock repatriation is merited: Buybacks are like a jolt of adrenalin for stock prices. Wall Street views them as a sign of health and, when a repurchase plan is unveiled, investors tend to pile into the stock, according to a research note by Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America. In addition to Trex, Facebook parent Meta Platforms and enterprise software maker Salesforce
CRM
enjoyed stock runups earlier this year when they declared buyback plans.

To be sure, large economic and market-wide trends can overwhelm a company’s buyback endeavors. In snake-bitten 2022, rocked by surging inflation and interest rates, the S&P 500 fell 19.5%. Housing and home products took an even more painful drubbing. Despite the robust repurchases, Trex’s stock got trashed last year, losing two-thirds of its value.

Now, Trex’s equity is on the way back. CEO Bryan Fairbanks remarks that “investors see value. They appreciate our disciplined approach” to running the business and managing the buyback program. “The market is giving us credit.” An analysts’ report from Stifel points out that, in the second quarter, revenue and earnings before interest, taxes depreciation and amortization came in above expectations.

Trex has the benefit of making a popular product that taps into people’s love for eating and relaxing outdoors, without leaving home. Composite decking, a sector that Trex dominates, has caught on with consumers: The planks look like wood but don’t splinter, are weather-resistant and spill-proof (an overturned red wine bottle won’t leave a stain). This synthetic decking is mainly reclaimed wood, fortified with recycled plastic, and lasts decades longer than actual wood. The company perennially improves its lineup, and has a new product, called Trex Transcend Lineage, that mitigates heat from the sun, so folks can walk on it comfortably. Trex also is making a big push into railing with the recent launch of its new T-rail system.

Judging from the stock’s upward trajectory, Trex has done well from buybacks. The same appears to be true of most companies that reclaim their shares, to the delight of investors.