CNBC Global CFO Council

Why the populist win in war against stock buybacks didn't slow the market

Key Points
  • Over one-third of S&P 500 companies suspended stock buybacks in the first quarter, representing over $400 billion.
  • Some companies did a quick about-face, like Starbucks, as the coronavirus crisis worsened. Others, such as airlines requesting government bailouts, did what they had to do.
  • Only companies with the strongest cash positions, like Apple, have been able to increase repurchases: Tech stocks represented 31% of all buybacks in 2019.
  • For all the talk of a market fueled by buybacks, a steep dropoff in activity since Q1's near-$200 billion has not held back stocks.
A Starbucks employee wears a facial covering while working on April 07, 2020 in Dallas, Texas. After defending its "strong balance sheet," the coffee chain suspended its share repurchase program in April.
Ronald Martinez | Getty Images

The populist outrage was ready, and a good part of corporate America responded.

Over one-third of companies in the Standard and Poor's 500 Index suspended their stock buyback programs in reaction to the coronavirus pandemic, according to a new review of first-quarter earnings reports by Informa Financial Intelligence.

Among companies that suspended buybacks are McDonald's, whose sub-$1 billion cash position came in for criticism as the company and its franchisees laid off thousands of workers. Other big names include 3M; chipmaker Intel; companies in the depressed energy sector, including ConocoPhillips and Chevron; retailers Best Buy and Starbucks; and travel agency Booking Holdings (owner of Priceline.com).

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For Starbucks it was a swift about-face. Its CEO had been defending buybacks in mid-March, even as Covid-19 roiled China business and  seating in stores stopped as concerns emerged the virus would hammer the U.S. At the time, CEO Kevin Johnson said the share repurchases were "backed by a strong balance sheet." But by the time of April earnings, the coffee chain suspended the program. Starbucks has since asked commercial landlords for rent reductions on store leases as a result of the coronavirus.

Popular sentiment helped play a role in curtailing buybacks, said Winston Chua, a financial intelligence analyst at Informa. So did some companies' need for the federal bailout money, which included a rule that companies that take federal loans and not buy back stocks until 12 months after repayment. Passenger airlines including American Airlines, United Airlines Holdings and Delta Air Lines all suspended share repurchases.

Companies know this will be a lost year, and they are keeping their powder dry as much as they can.
Sam Stovall
U.S. equity strategist at New York-based CFRA Research

"I'm not really surprised — it's protection and politics,'' said Sam Stovall, U.S. equity strategist at New York-based CFRA Research. "Companies know this will be a lost year, and they are keeping their powder dry as much as they can.''

Corporate America certainly has less fresh cash to fuel buybacks: CFRA says S&P 500 profits were down 11% in the first quarter and are likely to drop 40% in the second quarter, each compared to the same months of 2019. Profits for the year are expected to be 24% lower than last year, with declines persisting through all four quarters of 2020.

Q1 still one of best buyback quarters ever 

But the first quarter 2020 was not the low point for buybacks. With over 95% of the data in, S&P 500 companies posted $198 billion in repurchase expenditures, according to S&P Dow Jones Indices data, and while in line with the expectations at year-end 2019, that was "significantly higher than the updated March estimates," wrote S&P Dow Jones Indices analyst Howard Silverblatt in a recent note. "The takeaway is that companies were mostly in for the quarter."

In fact, it represents the fourth-highest total ever for quarterly buybacks.

The situation has changed since, with buyback activity sharply lower and expected to stay lower for longer. But that has not dinged stocks, which have continued their surge back from March lows this week. 

Buybacks have declined sharply and may be slow to come back for all but the richest, and bravest, companies.
Informa Financial Intelligence

Silverblatt assumes Q2 activity is limited to employee option coverage, some information technology stocks and positive cash-flow merchants (web, brick-and-mortar).  Discretionary purchases (which reduce share count and increase earnings per share) will be represented by fewer issuers with high liquidity "and nerve," he wrote.

"Also working against buybacks for Q2, beside cash flow, is the public and political view. If you thought they received attention in Washington (or on the campaign trail) before — [imagine] the reaction high programs and purchases could bring now," Silverblatt wrote. "Don't expect much and you won't be disappointed," he advised. 

Buyback reductions or suspensions are easier for companies to sell to shareholders than cuts in dividends, the other main way of returning profits to shareholders, Stovall said. 

"This year is already a kitchen-sink year, and some of them are throwing in the basement," Stovall said.

Financial Intelligence expects buybacks for the year to be about $917 billion, down 17% from the 2018 record of $1.1 trillion in announced repurchases, Chua said. 

"New buyback announcements during earnings were basically nothing except for Apple,'' he said, referring to the iPhone maker's $50 billion expansion of its existing buyback authorization, which was accompanied by the latest in a series of annual dividend hikes announced April 30.

Apple can readily afford it: The company reported record services revenue during the quarter that ended March 28, and earnings per share rose 4.4%. It also ended the quarter with $193 billion in cash, cash equivalents and marketable securities. About 62% of Apple's quarterly revenue also came from outside the U.S., making it less exposed to the rapid expansion of the pandemic here in March.

Near-$450 billion has been suspended in stock buyback programs this year.
Informa Financial Intelligence

Even before the pandemic, information technology stocks had grown to represent about 31% of S&P 500 buybacks in 2019, according to S&P Global Market Intelligence.

Like Apple, most companies that kept their buyback programs intact have plenty of cash to do so, considering that most are still making a profit and that CFRA and others expect profits to climb as much as 30% next year from depressed 2020 levels, Stovall said.

Those companies have a combined $910.1 billion in cash on their balance sheets, and $592.5 billion in remaining repurchase authorizations, Financial Intelligence says, covering companies that reported their plans by May 19. The companies that suspended repurchases by that date have $493.6 million in cash and had previously authorized $325 billion in buybacks.

At McDonalds the suspension of buybacks was only one of a series of moves to save and raise cash. The company also raised $6.5 billion in new debt in March to serve as a cushion, suspended new-store openings and construction in different markets and devoted about $1 billion to helping franchisees who were in danger of missing rent or royalty payments to the parent company. Intel also raised capital to pad its balance sheet for the downturn, as it suspended its buyback. Brinker, which raised a smaller amount of money, also suspended its stock dividend.

"We expect our operating cash flow to be down significantly this year," McDonald's executive vice president and chief financial officer Kevin Ozan said on the company's April 30 conference call with analysts. We entered the crisis with a strong balance sheet and we've taken a number of actions to preserve financial flexibility."

Buybacks have moved to the back burner for many companies as they seek to control costs and public image, as well as catch up on other priorities delayed by Covid-19.

Buybacks support stock prices and earnings-per-share because the lower share count resulting from buybacks increases remaining shareholders' earnings. According to S&P Dow Jones Indices, that is a significant factor in over 20% of the market. But the recent market surge shows investors coming to terms with expected declines in sales and earnings, and little impact from suspended buybacks in the short term.

Longer term, any widespread change in corporate buyback philosophy could have greater implications for the market. "The Street was addicted to them," Silverblatt wrote in a note during the worst of the crisis. "Once we believe we have hit bottom and turned up, buybacks may be slow to come back."

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