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After solid Q4, investors should brace for U.S. buyback come-down

By Sinéad Carew
·2 min read

By Sinéad Carew

March 24 (Reuters) - After a 3.2% increase in U.S. corporate share buybacks between the third and fourth quarters, investors will see Q1 reductions and a "dismal" Q2 as companies look to conserve cash during the coronavirus crisis, according to S&P Dow Jones Indices.

Along with the direct support to share prices when buybacks are made, they also swell earnings per share in quarterly reports as they result in lower share counts at the companies. But since they are easier to suspend than dividends, buybacks tend to be the first place companies reduce capital returns to shareholders in a downturn.

Companies that have already announced a pause in buybacks include the eight big U.S. banks that are members of the Financial services Forum. On Tuesday, announcements of buyback suspensions came from companies including Intel Corp and Chevron Corp.

Howard Silverblatt, senior analyst at S&P Dow Jones Indices, says buybacks may be depressed for the full year as "companies are going to be concerned about their liquidity" for a while even when things start looking up.

"When we believe the virus has hit the bottom then you start the long way up for the economy which is going to be relatively slow to recover. It's going to take a quarter or more for companies to put their toes back in the water," Silverblatt said.

U.S. companies spent $181.6 billion on buying their own shares in the fourth quarter, above the third quarter of 2019 but 18.6% lower than the record reached in the fourth quarter of 2018, due to a spending spree resulting from massive tax cuts.

Full year 2019 buybacks were $728.7 billion, down from the $806.4 billion record set in 2018.

Buyback spending in the fourth quarter was more concentrated however, with the top 20 companies accounting for 55% of the total, for the highest level of concentration since the first quarter of 2010 when the top 20 companies represented 59.8% of buybacks.

Almost 21% of companies reduced their share count by at least 4% in the fourth quarter.

Apple Inc led spending in the quarter with $22.1 billion in buybacks while three of the top 5 spenders on their own shares were banks - Bank of America, Wells Fargo , JPMorgan. The other big spender in the group was Bristol-Myers Squibb. (Reporting by Sinéad Carew; editing by Nick Macfie)