US companies cling to share buybacks despite collapse in profits

Corporate America is finding it hard to kick the share buyback habit, even after the US slipped into its worst recession in decades.

Total buybacks are expected to drop this year as the downturn caused by coronavirus saps corporate profits, prompting many US blue-chips to suspend or cut back share repurchases. Yet companies in the S&P 500 that have reported second-quarter earnings so far have reduced the number of their outstanding shares by an average of 0.3 per cent from the previous quarter, according to calculations from Credit Suisse.

Updates showed that some of the largest US multinationals continued to buy back their own stock or even accelerated stock repurchases.

Google’s parent company Alphabet spent $6.9bn on buybacks for the quarter, up 92 per cent from a year prior, the company revealed in its earnings results on Thursday.

Microsoft, the second-largest listed US company, purchased $5.8bn of its own stock in the period, up 25 per cent from a year earlier. Drugmaker Biogen spent $2.8bn on buybacks for the period, up 17 per cent from last year. WR Berkley, an insurer, did not buy any of its shares in the second quarter last year, but spent $97m on its stock in the period this year. 

Celanese, a chemicals group, increased its planned buybacks for the year by $500m to $1.5bn in July, after selling its stake in a Japanese joint venture.

Apple, which has spent the most on its own shares among S&P 500 companies in recent years, repurchased $16bn in the second quarter, down 6 per cent on the period last year, the company disclosed on Thursday.

David Lebovitz, global market strategist for JPMorgan Asset Management, noted that the buybacks were “not happening everywhere”, but were “driven by specific sectors and stocks”. He added that financial and materials companies were potentially more willing to engage in buybacks through the downturn, because their stocks have not advanced as much as companies in other sectors since the lows in March.

Berkshire Hathaway, the investment and insurance group run by billionaire Warren Buffett, ploughed about $5.3bn into stock repurchases during the quarter, according to estimates from Edward Jones. Berkshire reports its earnings next month and if the sum is confirmed it would mark the largest quarterly share repurchase since the company began buying back its stock in 2011, said James Shanahan, a St Louis-based analyst at Edward Jones.

The company did not immediately respond to a request for comment.

Line chart of Quarterly S&P 500 totals ($bn)* showing Companies favour buybacks over dividends

Stock buybacks are neutral, in theory, for a company’s value, as every dollar handed back to shareholders is a dollar less in equity. However, if buybacks exceed the rate of dilution through new issuance in the form of stock options then the reduction in shares outstanding increases earnings per share — potentially boosting prices — while increasing rewards for managers with pay plans linked to EPS.

Critics have fastened on to this aspect of repurchase programmes, saying they have become a way for companies to “sterilise” excessive executive pay.

Companies expanding repurchase programmes run against the grain of the broader market, where many businesses reduced or suspended buybacks as the downturn took hold. Second-quarter EPS for companies in the S&P 500 will probably drop about 39 per cent, according to estimates from financial data provider Refinitiv. 

In April Goldman Sachs projected that the amount spent by S&P 500 companies could halve this year, to $371bn — a significant drop from the activity in the years since Donald Trump cut the corporate tax rate from 35 per cent to 21 per cent in 2018. A record $806bn was spent on share buybacks that year.

Nearly a fifth of companies in the S&P 500 have put repurchase programmes on ice since March, including large commercial banks like Bank of America, Wells Fargo and JPMorgan Chase — typically among the biggest buyers of their own stock. 

But if conditions improve, analysts said that many companies may quickly resume buybacks. The Federal Reserve’s decision to cut interest rates close to zero and backstop credit markets has reduced companies’ borrowing costs, making them keener to shift the balance of their funding towards debt.

“As long as you’re a company that is earning money greater than your borrowing rate, you can just keep borrowing and buying back shares,” said Stephen Dover, head of equity for Franklin Templeton, the San Mateo-based fund manager.

Savita Subramanian, head of US equity and quantitative strategy for BofA, noted that announcements of buyback suspensions have slowed significantly since April, near the most intense phase of the Covid-19 crisis, and that there were “barely any” announced in June and July.

Buybacks have become a hot political topic in recent years and were in focus as Congress debated stimulus programmes this spring. Joe Biden and Donald Trump have both spoken out against the practice, noting that big programmes have often sucked free cash flow away from businesses.

Democratic senators Bernie Sanders and Chuck Schumer, the party’s most senior member of the Senate, have also called for curbs.

“Scrutiny around buybacks is already happening and will continue to happen,” said Mr Dover. “It was there before the current crisis and now it’s amplified.”