Stock Buyback is a method implemented by issuers in the market, for various reasons. These may include improving undervalued stock, appearing more financially appealing, returning cash to shareholders, and availability of debt at low-interest rates. Here, an issuer may buy back shares from either shareholder or through the open market.
Much of the time, Companies use liquid cash to start Buyback programs. This program would most likely come as a lightbulb moment for private investors: Fewer shares lying in the market would mean raising the values of already existing shares, prompting investors to fill up their portfolios.
This Year vs. The Last
In comparison to the past, stock reclaims have generally escalated in recent years. In 2020, when most of the world was shut down in response to the COVID-19 pandemic, many economies consequently suffered. In the early quarters of 2021, Government policies hammered down the number of buybacks. But later in the year, S&P 500 reported that the programs had increased significantly in Q4 as compared to Q3. More and more firms around the globe are now looking to repossess their shares.
The list includes many noted well-established issuers, including Walmart and Target. More recently, 2iQ Research published reports about buyback programs at Bed, Bath & Beyond Inc. (NASDAQ: BBBY) and Morgan Stanley (NYSE: MS). Both stocks experienced a substantial rise in stock price soon after.
Intention and Execution
The process of reclaiming shares begins with an announcement of an intention to purchase shares over a period of time. Taking $BBBY as an example, the retail company announced its intention to buy $1 Billion worth of shares in three years.
Next, Issuers may or may not commence the Execution of the shares. This can take place immediately after the announcement, or maybe after one to two months. Presently, Bed Bath & Beyond has repurchased more than half of the intended shares. Plainly, the intention is a limit the company has set for itself, given the circumstances. Sometimes, agencies will completely buy all shares or less than 100%.
In the past, many popular tech companies have stated their intentions to purchase nearly 1 trillion USD worth of stocks, including Apple Inc. (NASDAQ: AAPL) & Microsoft Corp. (NASDAQ: MSFT). A recent study found that Apple has spent nearly $20 billion on stock repurchases in its fiscal Q4 2021. It intended to buy nearly a trillion USD worth of shares at the time of the public announcement. So far, the company has executed only 47% of its intention.
Similarly, Microsoft completed 94% of its repurchasing program back in 2016. The tech giant is looking to continue its streak in 2021 when it announced a $60 billion buyback in September.
The Hits Keep Coming
In 2020, an article divulged that issuers listed in the S&P 500 Index bought back shares worth a total of $806 Billion in 2018 boosted by tax cuts with $1.5 trillion passed in late 2017. The writer went on to state that while these initiatives raise stock worth, they deprive the company itself of liquidity that would come in handy in the event of declining profits.
Moreover, buybacks funded by corporate bonds reached as high as 30% in 2016 and 2017. It is pertinent to note that, the companies used debt to enhance their retained earnings to finance capital investment that resultantly bolstered product revenue and corporate profits. The worst part, nonetheless, is that companies are using leverage for payout in the form of repossessing their stocks.
The situation grew more solemn when a 2019 CNBC report that most enterprises were using debt to finance their buyback initiatives, coming close to $1 Trillion worth of stock. Presently, the number of leveraged buybacks has risen significantly.
At present, the biggest remnant concern is this: Even an announcement of share reclaim is enough to send investors into a frenzy over a clear stock rise. But this short-term spike can come at the expense of the bigger, long-term investments.