US companies are rushing to buy back large batches of shares to take advantage of recent stock market volatility and reassure investors when growth slows.
According to data from Goldman Sachs, there have been $319 billion in new share buybacks so far this year. At the same time in 2021, there have been $267 billion in share buybacks.
Even recently listed companies, which traditionally spend cash to fuel growth rather than returning surpluses to shareholders, have joined the trend after sharp falls in their share prices made buybacks more attractive.
“The breadth of different industry groups buying stocks is the highest we’ve seen in a number of years, and volumes have increased,” said Michael Voris, head of structured equity at Goldman Sachs on everything else.”
Management teams use share buybacks to support demand for their shares and increase their profitability on an earnings per share basis by reducing the number of shares outstanding.
The average stock in the broad-based Russell 3000 index has lost more than 30 percent of its value so far this year, allowing companies that think their stocks are undervalued to buy more for the same price. Earnings growth is also forecast to slow as corporations grapple with rising inflation and supply chain issues, increasing the appeal of buybacks as an opportunity to boost earnings.
“Ironically, the buyback business tends to pick up during periods of volatility because there’s a downtrend, and so people who are fed up with cash see their opportunities,” said Craig McCracken, co-head of equity markets at Wells Fargo. “It’s a sign of underlying strength that companies expect things to continue to be fairly positive, so they’re using their money to buy back shares rather than holding it on the balance sheet.”
In addition to the increase in approvals — which may take several years to complete — companies have publicly announced more than $33 billion in so-called accelerated share buybacks, according to an analysis of company filings compiled by Sentieo. ASRs allow them to buy back large amounts in a matter of months.
“Accelerated buybacks send a strong signal to shareholders as the cash is earmarked to pre-purchase the shares,” Goldman’s Voris said.
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The total is already almost four times higher than the amount reported in the first quarter of 2021 and is likely to rise further when companies start publishing their first-quarter results next month.
ZipRecruiter, which went public through a direct listing less than a year ago, said “investing in undervalued stocks is an attractive option” when it announced a $50 million ASR last week. The company’s stock is down more than a quarter from its peak late last year.
Another recently listed company, fintech lender Upstart, launched a $400 million buyback program just 14 months after its IPO.
The spike in buybacks has been a rare bright spot for investment banks’ stock market operations, which have suffered a sharp fall in fees due to a slowdown in IPOs and other capital-raising activity.