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Stock buybacks are being slashed. Evercore ISI estimates that 99% of U.S. firms will have to reduce or suspend buybacks by year-end. Savvy timing. The stock market is down 30% with the share prices of some of the buyback cutters down even more. The big banks are cutting buybacks, but that was likely a directive from regulators.
Guess who else is slashing buybacks?
Airlines.
Over the last decade, the Airline industry spent almost all of its free cash flow on share buybacks. Today, buybacks are finished. Airlines are instead requesting a $58 billion bailout. You sort of feel bad for the industry because the virus was out of their control, but only for a minute. Where’s the prudent planning? The airline industry is a capital intensive, cyclical industry where demand shocks can’t be predicted but should be expected.
Shouldn’t these firms have a massive rainy day fund?
Consider that over the last five years, United Airlines repurchased $8.5 billion of its shares. With the shares down 65% YTD and lower than at any price the shares traded over the last five years, that’s $8.5 billion down the drain.
United didn’t pay a single dollar in dividends over the last five years. Not that we are in favor of taxing dividends (the opposite actually), but at least if United paid dividends some tax revenue would have made its way to the Federal Government that is now being asked for a bailout.
You can read more about the untimely buyback strike here from Bloomberg’s Elena Popina and Vildana Hajric:
For American companies under pressure to conserve cash, share buybacks are a luxury they can no longer afford.
So say analysts studying balance sheets and earnings estimates. It’s also the view that led eight major U.S. banks to halt the practice last week. More companies are expected to follow suit, say strategists at Evercore ISI. Worst-case scenario: if the outbreak lingers until the year-end, 99% of U.S. firms will have to reduce or suspend buybacks, the firm’s head of portfolio strategy said.
The trend highlights a predicament for equity investors used to companies swooping into the market any time it sags. While repurchases have put bottoms in routs in the past, they’re at risk of drying up in times of crisis.
“The total level of buybacks will come down significantly,” said Dennis Debusschere, head of portfolio strategy at Evercore. “This will be bad. Later in the cycle, when earnings growth tends to peak out, you have less earnings growth and less margin expansion, you tend to rely more on buybacks as a driver of total returns.”
As the virus took its toll, U.S. companies, whose willingness to repurchase shares gets credit in some circles for fueling the 11-year bull market while being pilloried elsewhere as waste, have turned their attention to essentials, such as their balance sheets.
The biggest U.S. airlines, which last decade spent 96% of their free cash flow repurchasing shares, are now awaiting $58 billion in grants and loans. Eight banks, including JPMorgan Chase & Co. and Bank of America Corp., said they will stop buying back their own shares through the second quarter, instead focusing on supporting clients and the nation during the epidemic.
With more companies joining Apple Inc. to Microsoft Corp. in slashing sales forecasts, and as credit stress builds, views on buybacks may shift. Corporate America’s cash is draining at the fastest rate in decades, with balances at S&P 500 companies excluding financial firms having fallen 11% in the past 12 months, according to data compiled by Goldman Sachs.
That doesn’t mean companies are running out of cash. At 15% of total assets, the level is higher than the historic average of 7%, Goldman data showed. But it could mean companies prefer to use their money elsewhere.
“Buybacks have been crucial struts of support for new money into equities as outflows have persisted for eight of the last 10 years,” Tobias Levkovich, Citigroup Inc.‘s chief U.S. equity strategist, said in a note. “Thus a likely drop now of 30% is a significant change to the trend.”
