Companies Are Taking a Breather on Buybacks

(Photo Credit: Alexander Grey/Unsplash)
(Photo Credit: Alexander Grey/Unsplash)

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Warren Buffett said in February only the economic illiterate could dislike them, so does that make the latest trend in stock buybacks dumb?

In the three months leading to June, S&P 500 companies spent just $175 billion on share buybacks, a 20% tumble compared with the year before, according to preliminary S&P data reported by the Financial Times this past weekend, the lowest amount since the early days of the pandemic. With interest rates likely to stay elevated for the foreseeable future, a buyback comeback isn’t in the offing, analysts say.

Buy-Back to Reality

Buybacks — as opposed to dividends — have for years been most companies’ preferred avenue for returning cash to shareholders. That’s at least in part because the additional (or artificial, some would say) demand for shares can in turn boost share prices, and because buybacks reduce the number of shares in circulation and therefore can boost profitability on an earnings-per-share basis. But critics will note that buybacks tend to benefit senior executives loaded with stock options rather than lead to any reinvestment.

But incentives have changed. Companies are now being pushed to reinvest in crucial areas like artificial intelligence and cleaning up supply chains, Jill Carey Hall, equity and quant strategist at Bank of America, told the FT. That leaves less cash to pay out shareholders. Worse, high interest rates — exacerbated by this spring’s banking crisis — have made buybacks less practical:

  • The $175 billion spent on buybacks in the second quarter marked a 20% decline year-over-year, as well as a roughly equivalent drop-off from the first three months of 2023, according to FT’s analysis.
  • Part of that collapse is due to a rapid change in the banking sector. This year’s first quarter marked the first time in six years that banks and financial groups surpassed tech players in the realm of repurchases, following a buyback-cautious 2022. But the implosion and fallout of Silicon Valley Bank slowed the rate of banking buybacks to a crawl.

“Going forward the concern is not so much about more bank failures, as new regulations,” Howard Silverblatt, senior index analyst at S&P, told the FT. “They need to protect their dividends again. When it comes between keeping dividends and buybacks, dividend wins every time.”

There’s a Tax for That: This year also launched a new era of buyback taxes, currently set at 1%. But that figure is widely expected to only go up in the years to come, Silverblatt told the FT. At this rate only, even Buffett would have to acknowledge that only a buffoon could truly love a stock buyback.