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The Covid-19 crisis has caused a major drop in the number of
corporates taking part in share buyback programmes in the US,
leading many to ask if the practice should be more heavily
As the crises leads to tens of millions of layoffs globally,
dividends to be cancelled and trillions of stimulus dollars to
be provided throughout the economy, the financial sector is
once again under public scrutiny – with share buyback
programmes at the centre.
S&P500 buybacks for 2019 totaled $728.7
billion – down 9.6% from the record $806.4
billion set in 2018. Apple led the way and spent $22.1 billion
– up from last quarter’s $17.6
Chevron, the largest oil producer in the US, told IFLR that
it is looking at and adjusting to an environment where supply
and demand is changing dramatically. "We have announced changes
to reduce our capital spending by about 20% or $4 billion,"
said Sean Comey, senior advisor of external affairs.
"Our financial priorities are unchanged. The dividend is our
number one priority. We've actually increased our annual
dividend payout for 33 consecutive years," he added. Chevron
has not cut its dividend since 1934 – in the depths of
the Great Depression – and has a long track record of
a secure dividend.
"We are taking strong
actions to preserve cash today, not just with the
capital spending reductions, but with the termination
of our share repurchase programme"
"We came into this environment with the strongest balance
sheet and lowest breakeven in the industry, and we're taking
strong actions to preserve cash today, not just with the
capital spending reductions, but with the termination of our
share repurchase programme and the continuation of efforts that
we have already announced to further reduce costs, improve
margins and improve efficiency in our underlying business,"
"All these are measures align with our financial priorities
to preserve long term growth but sacrifice in the short term in
response to the market."
See also: Inside
NYSE's response to the Covid-19 crisis
According to Standard & Poor’s the outlook
for buybacks in 2020, is unsurprisingly grim: "Covid-19 has
significantly changed the 2020 landscape, as dividends are
under pressure and buybacks appear to be gasping for air," said
Howard Silverblatt, senior index analyst for S&P Dow Jones
Indices. Pre-Covid-19 estimates predicted 2020 buybacks would
come close to or exceed the $806 billion record set in
The CARES Act, the US government's $2 trillion stimulus
bill, will provide $425 billion in loans to corporations of all
sizes across the country, including $58 billion alone for the
airline industry. The airline industry, which has put billions
of dollars of profit into share buyback programmes, has
suddenly found itself almost helpless, and requesting bailouts
from the US taxpayer.
American Airlines alone has spent about $12.4 billion on
stock repurchases since 2014: a significant segment of its free
One source, the director of equity derivatives at a major US
bank, told IFLR that these major programmes are a product of
low rates that eventually led to an abusive situation. "These
companies thought that there has been no reason to invest in
new projects because of uncertainty. When there is no clarity,
most have simply continued to conduct stock buybacks," he said.
"There is a certain degree of abuse going on. I think the
question is how you go about regulating that. Capital structure
is something that should be at the purview of management."
When companies conduct buybacks, the liquidity that could
help them cope when sales and profits decline in an economic
downturn is no longer available.
The director added that boards should be advising corporates
to stop buying buybacks and start investing in companies,
resources and people. "If you're in the business, you're in the
business to provide a product or service. A stakeholder versus
shareholder mentality is starting to change," he said. "This is
one aspect of that change. Most companies will realise that
only having a shareholder focus is not good policy."
See also: M&A market stalls amid Covid-19
Even President Donald Trump has
warned US corporates against using this bailout money to
conduct buybacks, and the legislation itself states that those
utilising the loan programme are not allowed to conduct
buybacks during the period of the loan, excepting pre-existing
In 2003 the Securities and Exchange Commission amended the
stock repurchase safe harbor rule under Rule 10b-18 of the
Securities Exchange Act of 1934. The amendment allowed
companies to buy stock in the market and not be accused of
doing so for manipulative purposes.
A lot of stock repurchases are driven by activist investors
insisting corporates do not squander generated cash, make bad
investments or give cash back to the shareholders.
"The recent tax reform was sold to the public under the
proviso that companies will use savings to reinvest in the
business and spend cap, creating jobs and stimulating the
economy," said Richard Truesdell, capital markets partner at
Davis Polk & Wardwell. "In fact, many of them didn't,
instead putting more into share buyback programmes."
"Recent tax reform was sold
to the public under the proviso that companies will use
savings to reinvest in the business"
Even before the coronavirus crisis a number of politicians,
such as Bernie Sanders, promoted policy to block all stock
buybacks. Maxine Waters introduced legislation to ban it
altogether. "A lot of people believe it is an evil thing,"
added Truesdell. .
If corporates never require bailouts, there would be no
concern. Running a business so that shareholders get wiped out
if there is a crisis is a concern, but a risk a company can
choose to make of its own accord.
"Even a free market libertarian like me would agree that if
a company is going to the government to get a bailout, for
either being too big to fail, like the banks, or being an
essential part of infrastructure like an airline, then it does
make sense to have limitations," said Truesdell. "Because
companies have siphoned off all their cash to the point that
when the bad times come, they then turn to the government and
the taxpayer to bail them out."
In terms of regulatory action, the director of equity
derivatives envisages regulation to prevent corporates from
altering the total share count using buybacks.
"Keeping the share count constant signifies that companies
are not only concerned with stocks being over or under priced,"
said the equity director, but are simply looking to make sound
investments. "There needs to be some degree of discipline
enforced by the government on the lender."
Back into the fold
Despite the negative press surrounding buybacks, and the
restrictions on many of those undertaking programmes, S&P
predicts the numbers will bounce back eventually.
This is a highly political issue with complex market
dynamics. Under a Democratic administration, whether that be
the president in the White House or both houses of Congress,
there would likely be calls for change – the extent of
which would also depends on which candidate is eventually put
"Even if the government didn't do something, a lot of
companies are more concerned with liquidity and cash at this
point," said Silverblatt. "It will be interesting to see when
Apple reports. Filings usually have a breakdown to see how many
and what kind of comments a company receives. Coronavirus is
going to be mentioned in every press release."
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