Typically, companies return wealth to shareholders through stock price appreciations, dividends and buybacks. Historically, dividends have been a dominant form of corporate payout. However, in recent times, share buybacks have surpassed dividends due to structural changes in the payout policy of US corporates.
In this article, we are going to highlight an interesting trend that is identified in 2iQ buyback data. While, buybacks in the US have more than tripled in a decade, the activity crashed to a five year low in the last week of March 2020, falling nearly 45% in time period of a month.
Buyback in S&P 500 and other US corporations
Quarterly comparison of the S&P 500 companies as well as other US corporations demonstrate a declining trend in the share buybacks even before the pandemic. We can see a decline from Quarter 4 2018, when the buybacks were at an all-time high. These prominent figures could possibly be attributed to the corporate tax cut on buybacks introduced in 2017. As a result, the US corporations were quick to repurchase their own shares, spending more than $860 billion in Q1 2018.
Apple (AAPL:US) was the frontrunner in this race to make the most of the tax cuts when in the first quarter of 2018, it spent approximately $23.5bn on stock repurchase, setting the record for the most buybacks than any other company in the S&P 500. In the same year, it also announced a $100 billion stock buyback program. However, in Q4 2018, Apple, along with many other companies pulled spending on buybacks.
This decline signaled the skepticism of management and investors towards growth prospects and the associated risks. Due to the ongoing tariff negotiations between the US and China, there were uncertainties in the market during this time. This led to investors preferring government bonds over equity markets; whereas the management became cautious due to global growth concerns. As the trend started to recover from the downfall as is evident towards the end of 2019, we noticed an even steeper fall starting after the first quarter of 2020.
Source: 2iQ Research
The second quarter of 2020 saw $46 billion worth of stock buyback in the US, with a little more than $24 billion attributed to the S&P 500 companies. This was a fall of 76% for all the US corporations and 85% for the cash-rich companies from the previous respective quarters. Compared to this, in the first quarter the buybacks followed a smooth trend with a slight decrease in 2020 for the S&P 500 companies, opposed to a slight increase for the overall US corporations.
As exhibited below, Financial and Information Technology sectors accounted for nearly half of the total buybacks held by US corporates in the last 3 years. Berkshire Hathaway, the investment and insurance group had halted buyback activity until Q3 2018 after which it bought back shares worth $13bn up to June 2020. Intel (INTC:US) from the Information Technology sector had an interesting outlook where it had spent $4.1bn on buybacks for the first quarter of 2020 which is an increase of nearly 70% from the same quarter prior year.
Source: 2iQ Research
Factors affecting Buyback
Examining the trend from 2iQ’s database, we notice a slight increase in the stock repurchases in the first quarter of 2020 by US corporations. The buyback amount in the US as compared to the Q4 2019 was up by 15%. More than 80% of this increase is due to the S&P 500, the constituents of which increased their buyback by 14%. However, a steep decline followed this success. The amount of buybacks reduced by more than $150bn for the US corporations, while the number of intentions reduced by approximately 68% in Q2 2020, falling from 258 intentions in Q1 to just 83 in Q2 2020.
Source: 2iQ Research
This can be attributed to the COVID – 19 and its effects on different sectors. While the Fed suspended buybacks for large banks in June, the top US banks, including JPMorgan Chase (JPM:US), Bank of America (BAC:US) and Citigroup (C:US), had settled for voluntary suspension since March to prevent a financial crisis due to the decreasing cash reserves. Apart from the major banks, companies such as AT&T (T:US) and McDonald’s (MCD:US) announced a halt in their buyback programme. In fact, in the second quarter of 2020, we saw buyback intentions from four sectors only, Financial, Health Care, Industrials and Information Technology, with all intending for a significantly lower number.
We believe that this decrease was because the US corporates were hoarding cash to prepare for the looming uncertainties, as the Financial and Industrial sectors had reduced buyback intentions by 90% in Q2 2020 as compared to the same quarter last year. However, the Healthcare sector stood out as the intentions hiked up by 350% as compared to same quarter last year. Not only were the intentions significant in this quarter, but the buyback, while reduced, were still undertaken by all the sectors.
The political situation could have had a role to play in the buyback anomaly that we notice here. Comments from Joe Biden, the presidential candidate, suggest policies against buyback. Stephen Dover, head of equity at Franklin Templeton believes that buyback checks will continue to rise in future, “Scrutiny around buybacks is already happening and will continue to happen”. As a result, firms, specifically from the financial and information technology sectors, were quick to repurchase shares. We witnessed more than $25 billion of buyback for these two sectors, amounting to 63% of the total buyback amount for that quarter, which we believe is because they felt the recovery post the Covid-19 slump was not forthcoming fast enough.
Threat of policy change is also why the rate of decline was not as much for Q3 2020. Though there is a decrease in the number of intentions, the decline rate is not as much. As per our data we have 62 intentions made in Q3 as compared to 83 intention in Q2 of 2020 - fall of 25%.
With the impact of corona virus and the political situation, the US market is more uncertain than ever. The US buyback market might have dipped in recent quarters but we believe that we could see a revival once the fear factor subsides and a vaccine for the Covid-19 is found. While the intentions and buyback seem to be at an all time low in the last three years, the financial and information technology sectors are at the forefront of ensuring that the buybacks in the US stay afloat during these uncertain times.