Canceled Stock Buybacks Mount, and They May Not Return for Years
Comment of the Day

March 25 2020

Commentary by Eoin Treacy

Canceled Stock Buybacks Mount, and They May Not Return for Years

This article by Phil Serafino, Kasper Viita and Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:

The comment suggested his distaste for the practice predates the coronavirus outbreak and echoed criticism from Democratic presidential candidates who have long viewed buybacks as a waste and social ill.

“When we did a big tax cut and when they took the money and did buybacks, that’s not building a hangar, that’s not buying aircraft, that’s not doing the kind of things that I want them to do,” Trump said on Friday. “We didn’t think we would have had to restrict it because we thought they would have known better. But they didn’t know better, in some cases.”

Trump said he would support a prohibition on buybacks for companies that receive government aid. The five biggest U.S. airlines -- prime targets for bailout funds -- spent 96% of their free cash flow on repurchases over the last decade, money that could have been used to build rainy-day funds. Overall
buybacks started to slow in the first couple of months of the year in the U.S., when they were $122 billion in January and February, down 46% from a year earlier in the slowest start to the year since 2009.

While some viewed share repurchases as one of the driving forces behind the bull market, the practice was constantly criticized, particularly in populist circles. Companies were simply inflating their stock prices inorganically, using cheap money in the process, so the argument went, exacerbating wealth inequality as the ultra-rich cashed out.

Eoin Treacy's view

Buybacks have been the primary source of demand supporting the market, particularly during pullbacks, over the last decade. The problem with relying on buybacks as a rationale for being bullish is they are inherently procyclical. The majority of companies are not in a position to buy back shares following big declines. Additionally, since debt loads have increased, at least in part to fund buybacks, they are overleveraged at peaks and debt obligations come before equity during a downturn.  

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