Why investors are relieved that record buybacks may end soon

Receding earnings growth, shrinking cash balances and recession fears are likely to constrain spending by companies, experts say

In the US, recent major buybacks include defence contractor Lockheed Martin. Sarwat Nasir / The National

The global buyback binge looks to be drawing to a close, and investors are unlikely to mourn the end of the record repurchase rush.

That is because executives would be well-advised to keep their powder dry, given rising interest rates, jittery consumers and mounting recession fears, according to fund managers.

Goldman Sachs Group strategists said that buybacks peaked in the first quarter and cut their outlook for S&P 500 repurchases by 10 per cent for 2023, citing the impact of margin contractions on earnings.

With companies coming off record buybacks, they can now focus on allocating their resources elsewhere, like mergers and acquisitions, long-term investments or cutting debt, said Kim Forrest, founder of Bokeh Capital Partners.

“If you’re heading into uncertain times and you’ve done big buybacks, you as a company can just tread water and your EPS [earnings per share] will go up or stay unchanged because now you have a smaller number of shares,” Ms Forrest said.

“It’s a way for companies to put their best foot forward.”

That is a view reflected in this month’s Bank of America global fund managers’ survey, which found that 60 per cent of investors want companies to improve balance sheets, while only 17 per cent advocate returning cash to shareholders.

For corporations, buybacks make sense right now.

Equities in Europe are the cheapest in 10 years, while those in the US sit on average long-term valuations with froth blown away by this year’s rout. That at a time when companies are showing near-record margins and have relatively clean balance sheets.

US companies are on track for a record $1.25 trillion of repurchases this year.

After that, buyback growth is set to slow as receding earnings growth, shrinking cash balances and recession fears are likely to constrain spending, Goldman strategists led by Ryan Hammond said.

Energy companies have led the buyback scorecard as their profits surged on higher oil prices, and now represent 5 per cent of total S&P 500 buybacks, up from less than 1 per cent in the first half of last year, according to Goldman.

But this trend is likely to be offset by a drop in financial companies’ share repurchases as they seek to meet capital requirements and prepare for an economic slump, the strategists said.

Among those energy majors that have made buyback announcements so far are TotalEnergies, which has a $7 billion share-buyback programme for 2022, while Shell said it will repurchase another $4bn of shares over the next three months, bringing the total repurchases for the year to $18.5bn.

In the US, other recent major buyback examples include defence contractor Lockheed Martin and aerospace technologies manufacturer L3Harris Technologies.

Tesla chief executive Elon Musk said the company could repurchase up to $10bn worth of shares in the next year.

In Europe, earnings season is setting the stage for an extension of what is already a record year for buybacks.

Among banks, UBS Group said it plans a “material” programme next year, while HSBC is considering repurchasing shares in the second half of 2023.

Chipmaker ASML Holding will update on the matter on November 11 after stronger-than-expected results. Cement maker Holcim said it will start a share buyback programme of as much as 2bn francs ($2bn) next month.

The UK has seen a particularly high level of buyback activity this year, with Imperial Brands joining in with the announcement of a £1bn programme.

But the outlook is deteriorating. Strategists at Bank of America and Morgan Stanley expect further earnings downgrades as rising costs of energy and wages pressure margins.

At least companies have the fallback that it is easier to reverse a repurchase programme than cut dividends.

Buybacks have also drawn certain scrutiny in Washington.

US President Joe Biden this month called on energy companies to plough their gains into production rather than giving more cash to shareholders.

A new 1 per cent tax on buybacks that will take effect next year will nix $1 from S&P 500 per-share profits in 2023, JP Morgan Chase's estimates show.