Coronavirus stops share buyback boom

Chris Nassetta wanted to send out a positive signal. In early March, the chief executive of hotel group Hilton said the company had set aside $2 billion (€1.85 billion) for repurchasing shares in the global chain. But what was intended as a sign of confidence in Hilton's long-term future came at a time when the COVID-19 pandemic was already beginning to tighten its grip on the US economy.

Just three weeks later, Nassetta was forced to backpedal on his bold promise, announcing Hilton would not only scrap its buyback program but even stop paying a dividend for last year amid attempts to secure precious cash and liquidity.

The Hilton CEO wasn't the only corporate head forced to acknowledge the world of business was changing as fast as the global pandemic was spreading. More and more companies are launching massive cutbacks of costs and investments to stop the rot in liquidity caused by sweeping lockdown measures.

Last week, US auto giant General Motors (GM) announced it would ditch buyback and dividend programs to protect its cash position. Similar moves are planned by oil major Chevron, investment bank JPMorgan Chase and cruise operator Carnival. By the time of writing, altogether 51 big US corporations had announced the suspension of plans to return cash to their shareholders.

Fuel for bull market run

Analysts from Goldman Sachs have estimated stock buybacks could fall 50% by the end of this year, to a total of $371 billion. David Kostin, one of the analysts with the US investment bank, says many chief financial officers would view "buybacks as the lowest priority use of cash" in the current crisis.

"A spate of recent suspensions, escalating employee layoffs, and increasing political and social pressure will curtail buyback spending," he told DW, as he expected the decline in repurchases to have "a significant impact on the equity market."

Within the analytics profession, the debate about the extent to which corporate buybacks have fueled the longest rally in US stocks is still open. Some say the repurchasing programs strongly sustained the 10-year bull market especially in its latter phase as buybacks drove stock prices amid weakening demand. Morgan Stanley analysts have found a company's shares to be an average 13% more expensive a year after its management had announced cash return measures.

In addition, many companies decided to destroy the shares they had bought back, subsequently reducing the total number of shares in the market and driving per-share earnings even higher.

During the 2018 record year of world-beating stock market gains, US corporations repurchased own stocks worth $800 billion, driving the total of share buybacks since the 2008/2009 financial crisis to $4 trillion.

US tech giant Apple was leading the pack, as the iPhone maker repurchased its own shares at a rate of $10 billion per quarter, spending almost $250 billion on the program over the last five years.

Death knell for the bull market?

But doubts are mounting if US stocks are able to claw back the massive losses they endured in the beginning of the coronavirus outbreak.

Research done by Ed Clissold, chief strategist at Ned Davis Research, shows the S&P500 index of the 500 biggest American corporations would have been 21.6% lower without company buybacks. "We can say that the S&P 500 Index would probably be lower today if not for buybacks versus other uses of cash," he claims.

And Brian Reynolds, strategist with Reynolds Strategy, adds that stock market volatility also would have been much higher "without a steady flow of corporate buybacks." Amid the current crisis, he expects volatility to return because "there won't be consistent demand for stocks."

"Corporate buybacks, in fact, have been the only net source of money entering the stock market since the financial crisis in 2008," Reynolds argues.

In the focus of politics

Amid multi-trillion-dollar bailouts and financial support for pandemic-stricken corporations, attempts to shore up stock prices by means of buybacks are under increasing scrutiny of US policymakers, who have long been wary of such programs. Under recent US congress legislation, pandemic support is given only to companies that curtail buybacks and dividends for the next 12 months.

The measures have forced numerous corporations to stop their programs — among them the five biggest US airlines which were returning 96% of their cash income to shareholders in the past 10 years. The eight biggest US financial corporations also decided to toe Washington's line, dropping plans to spend $119 billion on repurchasing their own stock. Few companies seem to be able to withstand the current political pressure.

That's with the exception of Apple though, which wants to continue buyback policies despite being barely able to squeeze growth out of the past pandemic-ravaged quarter. CEO Tim Cook announced earlier this month the technology behemoth would raise its dividend payment and even expand its share buyback plan by $50 billion this year.