Markets Help Companies Finance in More Ways than One

You might think stock markets’ biggest role in financing companies happens on the day of their initial public offering (IPO). 

Although IPO day is important to each company, data suggests that public markets see more company cash flows from secondary issues, buybacks and dividends. 

IPOs are smaller than secondaries

The annual SIFMA handbook always includes interesting data across asset classes and countries.

One chart that is interesting to me, working at a listing exchange, is below. It shows that IPO proceeds are actually a fraction of all capital raised by the U.S. stock market each year — even in a “big” year for IPOs, like 2021 (note that the SIFMA data excludes special purpose acquisition companies, or SPACs).

For example, last year, IPOs raised a total of $30 billion, while secondaries raised almost $170 billion.

Raising additional capital, for new acquisitions or projects, is another benefit of being a public company. Typically, secondaries are completed overnight, at a small discount to the closing price that day.

Chart 1: U.S. market secondary trades add to much more than IPOs 

Buybacks are bigger than secondaries

Of course, companies don’t always need to raise capital. Sometimes they want to return free cash flow to investors.

One way to do that is via buybacks. According to data from the Wall Street Journal, companies spend around $1 trillion each year on buybacks. That’s significantly more than the value of secondary finance raised.

Interestingly, other data from Bloomberg suggests that buyback spending is relatively concentrated, with the top 11 companies accounting for almost $500 billion of announced buybacks.

Chart 2: Buyback activity adds to even more than cash raises 

Dividends are similar in size to buybacks

Another way to return cash to shareholders is via dividends.

The data below, from Goldman Sachs, shows that dividends are similar in size to buybacks. Importantly, the data also shows dividends are typically very consistent over time. 

In contrast, in periods of recession, when sales typically fall, most companies significantly reduce buybacks. That helps them maintain cash flows for operations — surviving downturns. It also makes buybacks more cyclical.  

Chart 3: Share of cash flow usage by companies over time 

Companies manage financing in many ways

The data shows that although IPOs are important to each company when they happen, public markets also allow companies to efficiently raise capital from and return capital to investors — often at or near the prevailing market price.

That’s a critical way public markets help make investing, and asset allocation, even more efficient.