The Stock Buyback Binge Is Over. What That Means for Investors.

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What That Means for Investors. Politicians Want Clampdown on Stock Buybacks. What That Means for Investors. Politicians Want to Clampdown on Stock Buybacks. What That Means for Investors.

Companies are suspending stock buybacks to conserve cash in a sharply weakening economy. But repurchase programs are also coming under political threat.

The Stock Buyback Binge Is Over. What That Means for Investors.

Companies are trying to conserve cash in a sharply weakening economy. But repurchase programs are also coming under political threat.

https://twitter.com/JoeBiden/status/1240998489498288129 https://www.barrons.com/articles/delta-air-lines-suspends-dividend-best-buy-suspends-buybacks-51584897050 https://marriott.gcs-web.com/news-releases/news-release-details/marriott-international-provides-business-update-amidst-rapidly https://www.barrons.com/articles/share-buybacks-could-be-reined-in-across-industries-51584356401 mailto:andrew.bary@barrons.com Politicians Want Clampdown on Stock Buybacks. What That Means for Investors. By Andrew Bary JUNG YEON-JE/AFP/ Getty Images

After more than $2 trillion of stock buybacks among members in the S&P 500 index from 2017 through 2019, companies are starting to turn off repurchase programs to build cash.

The moves reflect the effects of a sharply weakening economy as entire sectors essentially shut down in response to the pandemic. But it is also becoming politically perilous maintain those programs.

Democratic presidential front-runner Joe Biden on Friday called for companies to end their buyback programs for the next 12 months, tweeting: “I am calling on every CEO in America to publicly commit now to not buying back their company’s stock over the course of the next year. As workers face the physical and economic consequences of the coronavirus, our corporate leaders cannot cede responsibility for their employees.”

Eight major banks—including industry leaders JPMorgan Chase (JPM) and Bank of America (BAC)—said a week ago that they would suspend their buyback programs through the end of the second quarter. Other banks, including top regional U.S. Bancorp (USB), have followed.

Goldman Sachs analysts have tallied buyback suspensions among another 30 companies beyond those eight banks. Some of them have been the hard-hit travel and leisure sector with airline industry leader Delta Air Lines suspending its buyback program and dividend on Friday.

The airline industry, which is seeking more than $50 billion of government aid, has been the focus of political anger over buybacks given widespread repurchase programs in recent years. Delta bought back about $2 billion of stock in 2019 and about $11 billion since 2013. American Airlines Group (AAL) has bought back $12.4 billion since 2014.

Both companies have seen their stock prices and market values shrivel. Delta is now valued at $14 billion and American, at just $4 billion. Delta stock finished Friday at $21.35 and American at $10.38.

Critics point out that both would have much more capital if they had banked their ample profits rather than repurchasing stock. Delta returned about 70% of its free cash flow to holders last year in stock repurchases and dividends. Delta has that it has done both: improve its balance sheet and return cash to holders. American’s stock buybacks in recent years considerably exceed its current market value.

Hotel industry leader Marriott International (MAR) indicated last week that its stock buyback program is on hold and it said its March dividend payable later this month will be its last “until conditions improve.” Marriott bought back $2.3 billion of stock last year at an average price of $133 a share—way above its closing price Friday of $74.

The announced suspensions mean that repurchases within the S&P 500 are unlikely to hit the $804 billion estimate for this year put out in February by S&P Global. It is a good bet that this year’s repurchases will be below the estimated figure of about $730 billion for last year—full-year totals aren’t available yet—and perhaps considerably so. The buybacks last year provided close to a 3% “yield” in addition to about a 2% dividend.

The eight big banks alone account for about $100 billion of annual stock buybacks. While they are pausing their buybacks through the end of the second quarter, there is a good chance there will be none for all of this year given the economic impact of the virus.

The eight banks, part of the Financial Services Forum, said last week that “the decision on buybacks is consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses, and the broader economy through lending and other important services.”

There has been sharp criticism among Democrats on Capitol Hill, including from Senate Minority Leader Chuck Schumer of New York, who see buybacks as beneficial to corporate executives and shareholders while harming workers. That argument is likely to become more widespread in the coming months.

There are also will be criticism of buybacks as a waste of shareholder money because many companies paid high prices for stock and are now out of the market when their shares are depressed. This has been the case in the energy industry and banking.

Tech companies have also been big buyers of their stock led by Apple (AAPL), which bought back about $79 billion of stock in calendar 2019—Apple is on a September fiscal year. It will be interesting to see how the tech sector handles the buyback issue.

Many including Apple and Alphabet (GOOGL) have enormous cash positions and may decide that now is the right time to continue or ramp them up with their stocks under pressure.

Starbucks (SBUX) see opportunity, authorizing a buyback program of 40 million shares this past week.

Given the political, economic and financial pressure, look for many more companies to scale back or suspend their stock buyback programs in the weeks ahead.

And with companies likely to run with stronger balance sheets once the effects of the coronavirus fade, it could be a while before S&P 500 companies get back to the record buyback activity of $806 billion recorded in 2018.

Write to Andrew Bary at andrew.bary@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.