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How Bleak Are Things for Buyback ETFs Amid Coronavirus Crisis

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Share repurchases and dividend payments are two popular tools used by companies to maximize shareholder value. President Donald Trump’s tax reform has aided these corporate actions in recent years.

About 22.8% of the companies took the buyback route in the third quarter of 2019 to reduce their share count by at least 4% and boost their earnings per share. The proportion of the companies was higher than 17.7% noted in third quarter of 2018.

However, the coronavirus-led cash crisis among corporations put a temporary embargo onthe trend. Notably, 23 companies in the S&P 500 have put their programs on hold so far this year as compared to none in 2019, per equity research firm Birinyi Associates, as quoted on Wall Street Journal. Also, companies’ future buybacks authorization through Mar 17 marked a 39% year-over-year decline.

Banks Announce Brief Suspension of Buybacks

Eight big U.S. banks — Bank of America BAC, Bank of New York Mellon BK, Citigroup C, Goldman Sachs GS, JPMorgan Chase JPM, Morgan Stanley MS, State Street STT and Wells Fargo WFC — suspnded share buybacks temporarily for the rest of the first quarter and the second quarter of 2020 as the coronavirus crisis roiled businesses and in turn markets. Many other U.S. banks have also decided on the same.

Oil Firms to Cut Buybacks to Save Up on Dividend Payouts?

Energy companie are known for high dividend payments. Exxon Mobil Corp. XOM yields 10%. The Anglo-Dutch Royal Dutch Shell Plc hasn’t cut dividend payments since World War II, and currently offers around 14% yield. BP Plc BP and France’s Total SA yield about 13.27% and 11%, respectively, per Bloomberg. Amid the ongoing oil market rout, maintaining the huge dividend payouts is a tall order.

Occidental Petroleum OXY has announced a cut in its quarterly dividend payout for the first time in 30 years by 86% to 11 cents a share from 79 cents, effective July. Occidental Petroleum’s dividend yield is as high as 26.29% as of Mar 17 (read: Oil Firms May Cut Dividends Ahead: ETFs & Stocks in Focus).

Along with many analysts, we believe that no big oil company would want to cut dividends as it will hurt the company’s credibility. As a restructuring measure, companies are cutting capital expenditures. An article published on Bloomberg says that Shell, Chevron Corp. and Total may slash their share-buyback programs (which are normally seen by investors as “more discretionary”) to save dividends.

A Few More Potential Halts in Buybacks

U.S. airlines companies — the worst hit by coronavirus — have now been asking for about a $50-billion bailout but have spent about $43.7 billion in cash on share buybacks since 2012. They in fact shelled out 96% of free cash flow last decade on buybacks, per Bloomberg.

Had that cash been lying with big airlines, they wouln’t have required bailout funds today, opine analysts. Airlines will probbaly still receive the emergency aid but the ongoing crisis and Wall Street analysts’ view on airlines’ reckless spending will likely limit their buyback spree.

Any Silver Lining?

Yes, there is. After a devastating market crash, stocks of many companies with strong fundamentals are now available at low prices. Businesses with decent liquidities will likely repurchase more of those stocks.

Per Wall Street Journal, companies such as Chinese e-commerce giant JD.com Inc. JD, business software company Oracle Corp ORCL, building-products maker Patrick Industries Inc. PATK and real-estate investment trust NexPoint Residential Trust Inc. NXRT have authorized stock repurchases lately.

ETF Performance

Having said this, we would like to note that overall sentiment in the buyback space is likely to be grim till the summer months. Pureplay buyback ETFs like Invesco Buyback Achievers Portfolio PKW (down 30.7%) and SPDR S&P 500 Buyback ETF SPYB (down 32.8%) have underperformed the broader S&P 500 index (down 25.2%) in the past month (as of Mar 17, 2020). The trend for buybacks is expected to remain grim in the near term.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
The Bank of New York Mellon Corporation (BK) : Free Stock Analysis Report
 
Morgan Stanley (MS) : Free Stock Analysis Report
 
Oracle Corporation (ORCL) : Free Stock Analysis Report
 
Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
BP p.l.c. (BP) : Free Stock Analysis Report
 
State Street Corporation (STT) : Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
JD.com, Inc. (JD) : Free Stock Analysis Report
 
Invesco BuyBack Achievers ETF (PKW): ETF Research Reports
 
SPDR S&P 500 Buyback ETF (SPYB): ETF Research Reports
 
NexPoint Residential Trust, Inc. (NXRT) : Free Stock Analysis Report
 
Patrick Industries, Inc. (PATK) : Free Stock Analysis Report
 
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