Stock-Buyback Plans Shrink (Once A Pillar Of Support For Stocks) (#GotBitcoin?)

The new coronavirus may threaten companies’ buyback plans—though a down market could also create a buying opportunity. Stock-Buyback Plans Shrink (Once A Pillar Of Support For Stocks) (#GotBitcoin?)

Planned buyback authorizations are at the lowest level in three years

U.S. corporations are signaling a reduced appetite for stock buybacks this year, undermining a pillar of support for stocks at a time of heightened volatility.

Companies authorized around $122 billion in future buybacks through February, according to data compiled by equity research firm Birinyi Associates, marking a nearly 50% drop from the same period a year ago and representing the slowest pace in three years. Meanwhile, S&P Dow Jones Indices projects that the total amount of buybacks in the final three months of 2019 was down 18% compared with a year earlier, totaling around $183 billion.

Companies repurchased around $730 billion of their own stock during 2019—one of the biggest sources of money flowing into the stock market. Analysts are still projecting around $800 billion in buybacks this year, according to S&P Dow Jones Indices, but that figure may be threatened by the uncertainty surrounding the new coronavirus’s effect on the global economy.

Stock buybacks reduce a company’s shares outstanding, which boosts its earnings per share, though not its overall profit. Companies enjoy the flexibility of buyback programs, which can be adjusted easily, whereas dividend payments—another common way for companies to return value to shareholders—are typically expected to be regular and, often, to rise over time.

After a 2018 corporate-tax change prompted two record-setting years for stock buybacks, investors are watching to see how companies are managing excess cash in a time of market volatility.

As the new coronavirus disrupts global supply chains and inspires concerns among consumers, companies are monitoring inventory and earnings pressure. Those forces may push them to be more protective of their cash in the near term, says Matt Miskin, co-chief investment officer of John Hancock Investments.

“It’s all about fortifying the balance sheet,” said Miskin. “The thought that the equity markets are going to be challenged hampers the buyback decision that corporate executives once came to more easily.”

A down market could also present a buying opportunity if a company’s stock has fallen along with broader indexes. The recent correction in equities provides an opportunity for companies to pick up more of their stock at lower prices.

Some companies are looking to do just that, cheering investors. AT&T shares jumped Tuesday after the company announced an additional $4 billion stock buyback program beginning in the second quarter. Hilton Worldwide Holding, which has bought $4.3 billion of its own stock since March 2017, authorized an additional $2 billion in buybacks on Tuesday after the market closed, rallying shares on Wednesday.

Many blue-chip names still have significant buyback runway from previous authorizations. Apple Inc. has $58 billion of stock still to purchase as of the end of last year, the largest amount outstanding, according to data from Birinyi. Union Pacific has $24 billion remaining, while Intel Corp has $23 billion.

So far this year, the biggest buyers of their own stocks are underperforming. The Invesco BuyBack Achievers ETF is down 16%, compared with an 8% drop in the S&P 500 during that same period. The SPDR S&P 500 Buyback ETF is down 15%.

“Usually the companies that do buybacks are mature companies, so they should not underperform on a correction,” said Vincent Deluard, director of global macro strategy at INTL FCStone. “If the market thinks a buyback is negative, why would you do it?”

Updated: 3-15-2020

Biggest U.S. Banks Halt Buybacks to Free Up Capital for Coronavirus

The pandemic ‘is an unprecedented challenge for the world and the global economy,’ the forum says.

The biggest U.S. banks put share buybacks on hold Sunday and pledged to put their capital to use helping consumers and businesses struggling with the rapid economic slowdown caused by the novel coronavirus outbreak.

The Financial Services Forum, which represents the biggest U.S. lenders and custody banks, announced the decision to suspend buybacks after the Federal Reserve cut its benchmark interest rate to near zero and took steps to prevent market disruptions and keep money flowing through the financial system.

The novel coronavirus pandemic “is an unprecedented challenge for the world and the global economy,” the forum said. The group’s members are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp. and State Street Corp.

Several U.S. banks have taken steps to ease the pain for consumers and businesses, waiving some fees and offering to work with struggling borrowers. Leaders of the biggest banks traveled to Washington last week to tell President Trump the industry was in good shape, despite the turmoil, and ready to help.

“The largest U.S. banks have an unquestioned ability and commitment to supporting our customers, clients and the nation,” the forum said Sunday.

Sen. Sherrod Brown, the top Democrat on the Senate Banking Committee, last week called on banks to suspend their buybacks. “Banks need to be investing in their communities right now, not investing in their CEOs’ stock portfolios,” the Ohio senator said on the Senate floor Thursday.

The novel coronavirus outbreak is the biggest test of banks’ stability since the financial crisis. The Fed’s emergency rate cut—its second in recent weeks—will crimp profits on their bread-and-butter lending businesses.

Bank stocks have fallen further than the broader market since the coronavirus selloff began late last month. The KBW Nasdaq Bank Index is down 34% so far this year and 19% this month alone.

Updated: 4-5-2020

If Companies Aren’t Buying Their Own Stock, Who Is?

Many companies have suspended share repurchase plans, removing a crucial pillar of support for the stock market during the coronavirus pandemic.

Hilton Worldwide Holdings Inc. added $2 billion to its stock buyback program on March 3, a vote of confidence among executives as the stock market began to slide.

Just over three weeks later, the hotel company would strip the business down to its core, furloughing employees, cutting expenses, mothballing capital expenditures and suspending its dividend and buyback plan.

During the intervening period, America’s corporations ground to a halt as the coronavirus pandemic rapidly spread beyond China. Travel restrictions around the world led to particularly acute pain for hotel companies such as Hilton, along with airlines, cruise operators and casinos. And the S&P 500 suffered its fastest-ever decline from a record to a bear market, now down 23% for the year.

Hilton wasn’t alone. Companies from Chevron Corp. to JPMorgan Chase & Co. to AT&T Inc. to Carnival Corp. have suspended their share-repurchase plans to conserve cash in recent weeks, removing a crucial pillar of support for the stock market as it struggles to find its footing after a record stretch of turbulence.

“They’re an endangered species,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said of buybacks. “During bad times, you don’t do discretionary spending.”

Corporate buybacks, in fact, have been the only net source of money entering the stock market since the financial crisis in 2008, according to Brian Reynolds, chief market strategist at research firm Reynolds Strategy. Buyback programs, through which companies repurchase their own shares on the open market, can help boost share prices by reducing the amount of stock outstanding and lifting a company’s per-share earnings, though not its overall profit.

Since the beginning of 2009, Mr. Reynolds estimates, buybacks have added a net $4 trillion to the stock market. Contributions from all other sources—including exchange-traded funds, foreign buyers, insurers, mutual funds, broker dealers, pensions, hedge funds and households—netted out to roughly zero, he concluded, based on the Federal Reserve’s quarterly flow of funds reports. The S&P 500’s market value is $20.9 trillion.

Without a steady flow of corporate buybacks, there won’t be consistent demand for stocks, Mr. Reynolds said, helping to make an already volatile market even more so. The S&P 500 averaged a daily move of 5.2% in March, the rockiest month ever. April kicked off with more turbulence.

“It’s going to be like riding a bucking bronco in the stock market for the next six months,” he said.

In the weeks ahead, investors will seek further clues about the health of the economy. The weekly jobless-claims report on Thursday has become a key leading indicator. Even more critical will be what the companies themselves are saying about their businesses when earnings season ramps up later this month.

Last year companies in the S&P 500 bought $729 billion of their own stock, just short of the record $806 billion from 2018 that was fueled by a corporate tax overhaul. When 2020 began, companies were expected to approach or exceed that record. Those expectations have since vanished.

Stock buybacks in the first quarter could approach $120 billion to $140 billion, but are “going to be few and far between” the rest of the year as companies tighten their wallets, according to Mr. Silverblatt.

The 43 companies in the index that have already suspended their buyback programs—among them banks, airlines, hotels and energy companies—represent about 25% of all the buybacks from 2019, Mr. Silverblatt estimated. To be sure, some of the biggest buyers of their own stock, including Apple Inc. and other tech companies, are expected to keep their programs alive.

Stock buybacks have long faced criticism in Washington. Most recently, congressional leaders agreed to impose limits on share repurchases and dividend payments for airlines and other companies receiving aid under the coronavirus-stimulus package. Some of the companies seeking aid, including the airlines and hotel companies, spent heavily on buybacks in recent years.

Some argue that the funds would be better spent on raises for employees, investments in technology or maintaining a financial cushion in the event of an emergency like the current pandemic.

Although companies have bought back shares since the earliest days of the stock market, buybacks grew in popularity in the 1980s after the Securities and Exchange Commission changed rules around the practice. They were seen as a way to return cash to shareholders because removing shares from the open market tends to push stock prices higher.

Shares of Hilton, for instance, rallied 5.4% the day after the company boosted its buyback plan last month. It isn’t clear how much, if any, stock the company repurchased before suspending the program; a representative for the company declined to comment. It bought back $1.5 billion in shares last year.

In the decade through 2019, S&P 500 companies poured $5.29 trillion into buyback programs, according to data from S&P. That was more than double the $2.59 trillion from the 10 years prior. Dividends saw a similar increase, nearly doubling to $3.53 trillion from $1.89 trillion.

It’s impossible to say exactly how much of the stock market’s gains over the past decade were directly attributable to buyback and dividend programs, according to Winston Chua, an analyst at research firm EPFR. Corporate takeovers, which remove shares from the public markets, and stock offerings, which add shares, are also in play, along with profits and investor speculation.

It’s a complicated mix, but “in any given year when buybacks and takeovers are greater than new offerings, the market tends to move higher,” Mr. Chua said.

Ironically, a broad move away from buybacks and dividends would be good for companies, said William Lazonick, an economics professor emeritus at the University of Massachusetts Lowell and president of the Academic-Industry Research Network.

“Companies that retain and reinvest profits, that have an incentive to build better products, they do better,” he said.

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