Bye, Buybacks? No, but Signs Show Some Companies Shifting Focus Away From Them.
There are some signs that stock buybacks, which have been a popular capital-allocation strategy for many U.S. companies, are losing some steam after starting off the year strongly.
Jill Carey Hall, equity and quantitative strategist at BofA Securities, observed in an April 5 research note that the dollar amount of first-quarter S&P 500 company buyback announcements as a percentage of market capitalization were 50% below their five-year pre-Covid average—0.4% versus 0.8%.
“We see a greater case for dividends over buybacks in 2022, so we’re expecting a pretty negligible impact to S&P 500 [earnings per share] from net buybacks,” Hall tells Barron’s.
Hall’s note adds that “while buybacks typically slow at the end of each quarter ahead of earnings season, buybacks by corporate clients slowed to their lowest weekly level in 12 months.”
At the same time, there have been a few recent examples of companies de-emphasizing or suspending share repurchases, most notably Starbucks (ticker: SBUX). Howard Schultz, the company’s founder who returned as CEO on April 4, said as one of his first orders of business that Starbucks was suspending stock buybacks effective immediately to “allow us to invest more into our people and our stores.”
In its earnings release summarizing the 2021 fiscal year, which ended last October, Starbucks said it was committing $20 billion for share repurchases and dividends over the next three years. The company spent about $2.1 billion on dividends last year but didn’t repurchase any of its common stock—though on a net basis, including share issuance, it bought back about $1.4 billion of stock in fiscal 2020 and about $10 billion in fiscal 2019.
Elsewhere, the CEO of chip maker Qualcomm (QCOM), Cristiano Amon, told CNBC recently that the company is targeting dividend increases in the high single digits or low double digits. “We are going to continue to look at an opportunistic buyback, but we want to maintain strategic flexibility also for M&A,” he said, referring to mergers and acquisitions.
If a buyback slowdown does occur this year, backward-looking data doesn’t necessarily tell the story.
First-quarter S&P 500 dividends set a record, according Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, adding that buybacks “still appear to be favored over dividends.”
BofA’s Hall, however, points to recent signs that share repurchases are slowing “based on our corporate client buyback activity, which provides a real time read and generally has been correlated with directional trends.”
For example, while the dollar amount of first-quarter BofA Securities’ corporate client buybacks was above those of other first quarters following the financial crisis of more than a decade ago, they were at their lowest level in five years when measured as a percentage of the S&P 500’s market capitalization.
Hall points to rising interest rates as another factor to consider in that they could cause a slowdown of companies using debt to buy back their shares. As a result, she says, “companies might prioritize balance sheet repair” or “business investment” over buybacks.
She adds there is nothing that would directly point to Russia/Ukraine specifically affecting buybacks.
For sure, buybacks, unlike dividends, give management teams more flexibility. A dividend, which is considered sacrosanct by many investors, is much harder to cut or suspend. Still, shares of Starbucks fell by 3.7% on April 4, the day of its buyout suspension announcement, and 4.5% the following day.
Meanwhile, Hall is looking for 13% dividend growth for the S&P 500 this year, partly due to “the high demand for dividend income.”
“When looking at buybacks versus dividends,” she says, “there’s more of a case to be made for dividend growth this year.”