The Stock Buyback Binge May Be Over. For Now.
The coronavirus pandemic has brought a sudden halt to one of corporate America’s favorite pursuits: the share buyback.
Two years ago, a tax overhaul package left big businesses flush with cash and touched off a record binge of companies scooping up their own shares, which helped push stock prices higher.
That’s all over for now.
The spreading outbreak has sent stocks down about 30 percent in the past month, triggered millions of layoffs and prompted the Federal Reserve to pump trillions of dollars into the economy to prevent collapse. And companies are navigating a rapidly shifting landscape — one in which spending cash to buy back their own shares is both politically and economically untenable.
Over the weekend, as Congress worked to fashion a $1.8 trillion stimulus package for the economy, President Trump lent his support to provisions in the bill meant to block companies that receive federal money from using it to buy back shares.
“I don’t want to give a bailout to a company and then have somebody go out and use that money to buy back stock in the company and raise the price and then get a bonus. OK?” President Trump said at a news conference on Sunday. “So I may be Republican, but I don’t like that.” It was a switch for the administration, which supported buybacks as an efficient way to inject excess corporate capital into the economy after the tax overhaul took effect.
Democratic leaders, including Senator Elizabeth Warren of Massachusetts and Senator Bernie Sanders of Vermont, have also called for or supported bans on buybacks by companies that receive assistance.
“Buyback activity will slow dramatically, both for political and practical reasons,” Goldman Sachs stock market analysts wrote in a research note published on Monday. “First, politicians are denouncing repurchases given the impending recession. Second, from a practical perspective, as revenues evaporate firms will be looking to preserve cash.”
AT&T, Nordstrom and McDonald’s are among the companies that have recently suspended buyback programs, as have big banks such as JPMorgan Chase and Citigroup. Boeing, which suspended its buyback program last year after problems with its 737 Max aircraft, extended the pause in repurchases.
But buybacks were a fraught topic well before the coronavirus outbreak.
When companies have excess cash on their hands, they typically return some of that money to shareholders — either in the form of a dividend payment or through a share buyback. By repurchasing stock, a company reduces the number of shares in the open market. The reduced supply of shares tends to push prices up.
Investors have long been enamored with buybacks for that reason — even the announcement of such a program would often send a company’s stock price shooting higher — and companies have preferred them to paying out dividends. But critics of buybacks say they’re a poor use of company cash that could instead be invested in long-term growth and workers.
Companies in the S&P 500 stock index spent more than $2 trillion buying back their own stocks over the last three years, which helped solidify the status of corporations as the single largest source of demand for American stocks. But the recent slump has mostly wiped out the gains; more than $8 trillion in shareholder value has vanished over the past month.
Republicans who had pushed for the tax cuts said they would increase economic growth, prod companies to invest and raise wages for workers. But the results were mixed: Wages did rise, but growth in the gross domestic product didn’t accelerate meaningfully. And investment slumped, in part because of last year’s trade war with China. Democrats pointed to the boom as proof that the law was a giveaway to corporations and the wealthy — over 80 percent of household stock ownership is controlled by the wealthiest 10 percent of American households.
Now, with both the president souring on the practice and critics in Congress turning up the heat on buybacks as they hammer out the details of a stimulus bill, investors have grown leery, too.
In recent weeks, they’ve jettisoned stocks of companies that are the among the largest buyers of their own shares. From the market’s peak on Feb. 19 through the close of trading on Monday, the S&P 500 buyback index — which measures the performance of the top 100 companies with the highest buyback activity — fell 42.5 percent. That performance was worse than the regular S&P 500 index, which was down roughly 34 percent.
“It’s significantly underperformed,” said Ben Laidler, chief executive of Tower Hudson Research, a financial markets research firm in London. “The market is certainly worried about this for some of those stocks.”
Buybacks might shrink for the foreseeable future because companies would rather save their cash and don’t want to be singled out for criticism by politicians, analysts said. Already this year, announcements of new plans for buybacks are down more than 35 percent — in dollar terms — according to data from Birinyi Associates, a financial markets research group.
Perhaps no other industry illustrates the awkward position that corporate America finds itself in more than airlines. Major airlines spent $19 billion repurchasing their own shares over the last three years. Now, with the coronavirus virtually paralyzing the global travel industry, these companies are in deep financial trouble and looking to the federal government to bail them out. The Treasury has asked Congress to approve around $50 billion in emergency loans to shore up the airline industry. Delta and United have suspended their buybacks, and airline executives have committed to halting buybacks for the life of the federal loans they might receive.
Banks, too, have received rising levels of support from the Federal Reserve, which has intervened repeatedly in the market to ensure borrowing costs remain low in key short-term financial markets. Such assistance makes it politically impossible to spend billions of dollars repurchasing shares, Mr. Laidler said.
“You can’t essentially be seen to be ta
king assistance at the same time you’re buying back shares and returning money to shareholders,” he said.
A trade group representing large banks such as JPMorgan Chase, Bank of America and Citigroup announced this month that its members were suspending buybacks, saying their goal was using their available capital to “provide maximum support to individuals, small businesses and the broader economy through lending and other important services.”
Other major companies are cutting their buybacks because of more pressing needs. Boeing, which extended the halt of its buyback program and cut its dividend last week, has sought $60 billion in government support for the aerospace manufacturing industry.