The global buyback binge looks to be drawing to a close, and investors are unlikely to mourn the end of the record repurchase rush.
That’s because executives would be well advised to keep their powder dry, given rising interest rates, jittery consumers and mounting recession fears,according to fund managers. Goldman Sachs Group Inc. strategists say that buybacks peaked in the first quarter and cut their outlook for S&P 500 repurchases by 10% for 2023, citing the impact of margin contractions on earnings.
With companies coming off record buybacks, they can now focus on allocating their resources elsewhere, like mergers and acquisitions, long-term investments or cutting debt, said Kim Forrest, founder of Bokeh Capital Partners.
“If you’re heading into uncertain times and you’ve done big buybacks, you as a company can just tread water and your EPS will go up or stay unchanged because now you have a smaller number of shares,” Forrest said in an interview. “It’s a way for companies to put their best foot forward.”
It’s a view also reflected in this month’s Bank of America Corp. global fund managers’ survey, which found that 60% of investors want companies to improve balance sheets, while only 17% advocate returning cash to shareholders.
For corporations, buybacks make sense right now. Equities in Europe are the cheapest in 10 years, while those in the US sit on average long-term valuations with froth blown away by this year’s rout. That at a time when firms are showing near-record margins and have relatively clean balance sheets.
US firms are on pace for a record $1.25 trillion of repurchases this year. After that, buyback growth is set to slow as receding earnings growth, shrinking cash balances and recession fears will likely constrain spending, Goldman strategists led by Ryan Hammond say.
Energy companies have led the buyback scorecard as their profits surged on higher oil prices, and now represent 5% of total S&P 500 buybacks, up from less than 1% in the first half of last year, according to Goldman. But this trend will likely be offset by a drop in financial companies’ share repurchases as they seek to meet capital requirements and prepare for an economic slump, the strategists said.
Among those energy majors that have made buyback announcements so far are TotalEnergies SE, which has a $7 billion share-buyback program for 2022, while Shell Plc said it’ll repurchase another $4 billion of shares over the next three months, bringing the total repurchases for the year to $18.5 billion.
Over in the US, other recent major buyback examples include defense contractor Lockheed Martin Corp. and aerospace-technologies manufacturer L3Harris Technologies Inc. Tesla Inc. Chief Executive Officer Elon Musk said the firm could repurchase up to $10 billion worth of shares in the next year.