Decline in share buybacks due to coronavirus

  •   16/06/2020 - 13h39
  •   HARMANT Adeline

While we have seen an increase in corporate share buyback offers in recent years, it would appear that the coronavirus crisis has just ended this cycle, as companies now need to raise capital and favour share issues.

Decline in share buybacks due to coronavirus

The end of the scarcity of available actions :

In recent months, we have seen a real surge in equity issues, whereas in previous years, companies favoured share buybacks, mergers and delistings, which have led to a scarcity of securities and increased their valuations.

Political pressure from the political authorities is one of the reasons for this diversion of companies away from share buybacks, which are designed to reward shareholders while they are receiving public aid and planning staff reductions.

According to analysts' forecasts, the supply of securities is expected to increase by $500 billion, while share buybacks will amount to barely $450 billion, i.e. half as much as in 2019. In the US alone, share buybacks are expected to halve to $370 billion.

 

The likely effects of this reversal on the financial markets :

According to analysts, this increase in equity supply should have a negative impact on the markets and boost volatility as companies will stop buying back their shares when stocks decline.

However, this increase in the number of securities on the market will not only have disadvantages if it favours an increase in investment by these companies. Indeed, companies that will no longer buy back their shares will have the opportunity to deploy their capital in their supply chains in automation or in research and development. But this is a long-term consequence of the current crisis.

It should also be noted that in 2018, corporate investment spending was up by only 2% and the share of corporate cash devoted to such investment had reached a ten-year low with rising dividends, share buybacks and larger acquisitions as well. Thus, while share buybacks will undoubtedly weigh in the balance, equity markets will be able to benefit from further support as companies will be less capital-intensive than before and will no longer need to raise massive amounts of funds. It should also be noted that equities on the stock market are likely to benefit from a persistent and above-average risk premium over the long term.

Of course, we are not going to see a disappearance of share buybacks, but the companies that continue to do so will be subject to greater scrutiny by investors. Investors will be looking for companies that finance their dividends through earnings and not through debt, and many companies will have to reduce their debt levels before they can do that by rebuilding their balance sheets.