You feel that the biggest role of stock markets in financing companies is on their early public offer (IPO).
Although IPO Day is important for each company, data suggests that public markets see more company cash flows than secondary issues, buybacks and dividends.
IPOs are smaller than secondary
The annual SIFMA handbook always includes interesting data in asset classes and countries.
A chart that is interesting for me, working on a listing exchange is below. It indicates that IPO income is actually a fraction of all the capital raised by the US Stock Market every year – even in a “big” year for IPOs, such as 2021 (note that SIFMA data excludes special purpose acquisition companies, or SPACS).
For example, last year, the IPO raised a total of $ 30 billion, while the secondary raised around $ 170 billion.
Rawning additional capital for new acquisitions or projects is another benefit of being a public company. Usually, at a small discount for the concluding price that day, the secondary secondary is completed overnight.
Chart 1: US Market Secondary Trades add a lot to IPO
Buyback is older than secondary
Of course, companies do not always need to raise capital. Sometimes they want to return free cash flow to investors.
One way to do this is through buyback. According to The Wall Street Journal data, companies spend about 1 trillion dollars on buybacks every year. This is much higher than the value of secondary finance.
Interestingly, other figures of Bloomberg suggest that the buyback expenditure is relatively concentrated, with the top 11 companies responsible for the declared buyback of approximately $ 500 billion.
Chart 2: Buyback activity is more than raising cash
Dividends are similar to buyback size
Another way to return cash to shareholders is through dividend.
Data below Goldman Sachs shows that dividends are similar to the size of the buyback. Importantly, data also shows that dividends are usually very consistent over time.
Conversely, in the recession period, when sales usually fall, most companies significantly reduce buybacks. This helps them to maintain cash flow for operation – to avoid recession. It also makes the buyback more cyclical.
Chart 3: Part of cash flow by companies over time
Companies manage financing in many ways
Data suggests that although IPOs are important for each company when they are, public markets also allow companies to efficiently increase capital and return capital – often on or near the prevailing market price.
This is an important way that public markets help investing, and property allocation, even more efficient.
