With the coronavirus crisis crippling the global economy and stock market, more and more companies are calling off plans to spend billions in stock repurchases. Widespread suspension of operations, rising employee layoffs, and escalating political and social pressure are prompting companies to curtail buyback spending.
Companies across the globe are facing unprecedented challenges and taking stringent measures to tackle the crisis. Suspension of dividends and buybacks, capex reduction, forced leaves/layoffs and cost cutting are becoming commonplace. Despite policymakers’ best efforts, companies are finding it difficult to stay afloat amid such trying times. With uncertainty over liquidity at the highest since the 2008 financial crisis, stock buybacks — which are a key pillar of support for the stock market during tough times — have taken a backseat.
COVID-19 Wallops Economy, Puts Brakes on Stock Buyback Frenzy
Robust cash flows, sturdy balance sheets, record profits and increased investor demand have been fueling buybacks since the global financial crisis of 2008. These have been propelling U.S. equity demand, in turn keeping the stock market afloat even when other drivers of share price failed to offer support. Since 2009, buybacks have added around $5 trillion to the stock market.
Notably, in 2019, stock buybacks within the S&P Index totaled around $729 billion. The figure fell short of the record $806.4 billion in 2018, which was attributed to corporate tax overhaul. Prior to the outbreak of COVID-19, S&P Dow Jones Indices projected that 2020 share buybacks “would come close to or exceed the record set in 2018,” which ranked highest in the index’s history.
However, the buyback binge is quickly fading amid the COVID-19 pandemic. More than 50 firms in the S&P 500 Index have suspended their share repurchase programs since the start of March. Amid the virus rampage, it is now estimated that stock buybacks in 2020 may witness “a complete reversal of the 2018 buyback bonanza.” Per Goldman Sachs, stock buybacks by S&P 500 companies will fall 50% to $371 billion this year.
The coronavirus outbreak has pushed stocks into a bear market, with the S&P 500 Index declining around 18% on a year-to-date basis. The deadly virus has not only claimed human lives but also wreaked havoc on the global economy, in turn affecting global trade, investment, travel and tourism, as well as the supply chain.
Stock buyback programs are feeling the heat of weakened revenue streams, and grim consumer and business confidence. What’s more, the $2-trillion coronavirus stimulus package requires companies that accept federal aid to swear off dividends and share buybacks until 12 months, after the loan is repaid in full. Restrictions tied to government loans and efforts to bolster cash in the wake of the gloomy business scenario have cast a shadow on share repurchase programs. Additionally, the rising debate on buyback may further stifle such programs. Opponents of buybacks are of the view that the capital allocated for the purpose should rather be utilized for revving up investments, building emergency funds and other productive uses.
Firms Hit the Pause Button on Buybacks to Conserve Cash: A Few Instances
The coronavirus outbreak has ripped apart most industries, with airlines, auto, energy, cruise, hotels, restaurants, cosmetics and apparel taking the nastiest hits. As the saying goes, desperate times call for desperate measures. Hence, a slew of companies across sectors have recently canceled stock buyback plans.
With travel demand evaporating overnight amid the pandemic, the airline industry has been brought down to its knees. Air carriers including Delta Air Lines (
DAL - Free Report) and Alaska Air Group have already halted share repurchases. As many airline companies are begging for bailout under the $2-trillion relief package, they are likely to switch off their buyback machines soon.
Multibillion-dollar share buyback programs have been suspended by eight big banks — JPMorgan, Bank of America (
BAC - Free Report) , Goldman Sachs, Bank of New York Mellon, Citigroup, Morgan Stanley State Street and Wells Fargo — on account of unprecedented challenges from the coronavirus pandemic.
The Energy sector is in disarray under the twin strains of untamed supply from major producers in the face of continuously falling global consumption on account of the coronavirus pandemic. Amid the bleak scenario, energy mammoths including Shell, Chevron (
CVX - Free Report) and TOTAL have suspended buybacks, along with other cost-cut measures.
Aerospace giant Boeing, reeling under fundamental and geopolitical woes, has suspended dividends and extended its buyback pause until further notice. Telecom giant AT&T (
T - Free Report) withdrew plans to repurchase $4 billion worth of stock due to the coronavirus pandemic. Coronavirus jitters prompted chipmaker Intel ( INTC - Free Report) to halt its share repurchase program. Both AT&T and Intel carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
The Auto industry — which is struggling with factory closures, low footfall at dealerships and supply chain distortions — is resorting to several cost-containment measures. Notable names in the industry including AutoZone, CarMax, Lear, Group 1 Automotive and Genuine Parts have called off buybacks to preserve financial flexibility.
Other notable names like Adidas (
ADDYY - Free Report) , McDonald’s ( MCD - Free Report) , Bed Bath & Beyond, Dave & Buster’s, Brinker International, Nordstrom, Best Buy, Kohl's, Marriot Vacations and various others were forced to announce suspension of buybacks amid virus woes. Brace for More Buyback Suspensions
Coronavirus-led uncertainty is forcing industry players to take rigorous measures for cash preservation. Global financial markets are going through a rough patch, which is likely to make many more firms across a variety of sectors vulnerable in the days ahead. Investors should brace for more share-buyback suspensions until coronavirus concerns cool down. In fact, some market watchdogs anticipate that companies will continue to rein in share repurchases for quite a few years, preventing equities from reaching pre-coronavirus valuations.
Drop in investor sentiments and rising unemployment levels are increasing the possibility of a recession. Given the rising possibility of recession in 2020, cash is the king for businesses. Lower buybacks imply stronger liquidity position, allowing room for investment in product development and businesses, which is the need of the hour. A pullback in buybacks is likely to drastically shift the supply-demand structure for U.S. equities. Absence of a steady stream of buybacks is likely to leave a multi-billion dollar hole in stock demand and cripple the already volatile market.
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
See 5 Stocks Set to Double>>