Share buyback freeze in markets rising due to COVID-19 impact, says GlobalData

As tracked by GlobalData’s news database, companies across diverse industries and geographies have already started announcing stoppage of share buybacks. Financial services, technology and retail are the top sectors discussing a pause in stock buybacks.

US markets have historically been hotspots for buybacks, however, the spread of COVID-19 has caused a freefall in share prices. Millions have been left unemployed and the Federal Reserve has been pressurized to spend billions to prevent a collapse of the economy. The European Central Bank has also responded by forcing banks to suspend buybacks until October 2020.

Aurojyoti Bose, Lead Analyst at GlobalData, says: “Two years ago changes in corporate taxes left companies with strong cash reserves in the US. This prompted big businesses to spend heavily on share buybacks. In the current scenario, COVID-19 and the government’s bailout package have put a halt on such plans.”

The US Government signed a US$2 trillion package to revive companies and the economy. Under the plan, companies opting for loans will be barred from spending on buybacks and dividends for a year till loan repayment. Top banks including Citigroup, Bank of America and JPMorgan Chase announced buyback suspensions, while having plans to defend dividend payments.

AT&T, McDonald’s, Intel and Adidas were some of the prominent companies announcing stoppages to their buyback plans. Boeing, which previously halted its buyback program due to 737 MAX problems, extended the suspension of share repurchases.

Oil and gas giants Royal Dutch Shell and Total also announced halts to stock repurchases to deal with the high market volatility and conserve cash. Oil prices stood at lows not seen in decades.

Bose adds: “Temporarily preventing share buybacks under the bailout plan is a necessary measure induced by the government to stop businesses from using federal money for gains in the market. Companies will now be expected to maintain balance sheets capable of withstanding future impacts.”

The outbreak wreaked havoc on the airline industry, which is known to spend good sums on share buybacks. Most airlines are currently under deep financial stress and expect emergency loans to bail them out. Delta and United are prominent airline companies that have stopped repurchases, while several executives in the airline industry have committed to buyback suspensions until the loans are repaid.

Bose concludes: “Several companies have faced criticism for using buybacks as a mechanism to increase shareholder returns without improving the business. If lessons are learned from the ongoing COVID-19 crisis, businesses will have to maintain cash reserves and not overly spend profits on share repurchases.”