Analysts are expecting S&P 500 earnings to surge 40.7% in 2021 off of extremely easy pandemic comps. On Tuesday, DataTrek Research co-founder Nicholas Colas said one of the impacts of that burst of earnings growth will likely be a huge increase in S&P 500 share buybacks.

The Numbers: Before the pandemic, S&P 500 companies reported $1.305 billion in 2019 net operating profits. About $485 billion of those profits (37%) went to dividends, while $729 billion (56%) went to stock buybacks.

In 2018 and 2019, 99% and 93% of S&P 500 net operating profits, respectively, went to either dividends or buybacks.

“With S&P earnings now 23 percent higher than 2018 to 19 ($162/share then, $200/share now), we should expect to see many companies in the index dramatically increase their return of cash to shareholders over the rest of 2021 and into 2022,” Colas said.

Buybacks Over Dividends: Colas said investors should anticipate companies will prioritize buybacks over dividends in the current climate, given the uncertainties that lie ahead in 2022 and beyond.

Investors tend to react more negatively to dividend cuts than a pause in buybacks in the event of another economic downturn, so he said investors should expect a relatively high percentage of excess profits to go to buybacks for now.

In the first quarter of 2021, S&P 500 companies bought back stock at an annual run rate of about $712 billion.

If they were to return to 2018 and 2019 levels based on updated earnings expectations, they would be buying back stock at about a $1-trillion annual run rate, Colas said. In other words, investors can expect at least an additional $250 billion per quarter in buybacks over the next several quarters.

More buybacks are generally good news overall, but simply returning to pre-pandemic levels of capital returns isn’t a particularly bullish catalyst.

“A large increase in stock buybacks is therefore certainly good, but not great, news for U.S. equities,” Colas said.

The technology and financial sectors alone have accounted for 52% of all S&P 500 share buybacks over the past five years.

This story originally appeared on Benzinga. © 2021 Benzinga.com.

Benzinga does not provide investment advice. All rights reserved.

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