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US companies put liquidity before buybacks

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As the COVID-19 pandemic bites, only US tech giants are able to keep buying back stock, as most sectors eliminate repurchases to bolster liquidity.

by Manpreet Singh

Published: May 12th 2020

With US companies buying back $877 billion of stock last year, managing buybacks has become a core treasury function in recent years. But now, as the COVID-19 pandemic hits revenues, corporates have started to cut down on cash spending particularly in terms of share repurchases.

Aside from technology giants like Apple or Google, listed companies in the US have either cut down their spending on stock buybacks or they have temporarily suspended it for the rest of the year.

In 2017, the Tax Cuts and Jobs Act which slashed corporate tax rates, encouraged US companies to repatriate cash held offshore. This, in turn, became an opportunity for companies to buy back their own shares from the market. In the following year, companies bought over trillion dollars’ worth of shares which was the highest since 2007.

Since 2017, companies have bought $2.6 trillion worth of shares while they issued shares worth of just $1.4 trillion, according to data compiled by the Federal Reserve. The majority of stocks brought have gone towards share retirements. Since 2017, there has been a shift in share repurchase pattern in which the majority of stocks bought are towards share retirement while less than half are for mergers and acquisitions.

The boom in buybacks has been accompanied by an increase in corporate borrowing, with $1.27 trillion of new debt issued during the same period.

With the spread of COVID-19 affecting their businesses, companies are struggling to maintain cash flows and amid declining revenues. Most companies are pausing their stock buyback programmes in order to maintain access to funding and keep cash available for future uncertainties.

But this is not the case with every sector. Cash-rich US tech companies whose revenues are being boosted by cloud services and remote working during the crisis have committed to keep buying stocks in 2020. Apple led the pack by repurchasing stocks worth $18.5 billion. According to Apple’s Chief Financial Officer Luca Maestri, “Our approach to capital allocation has remained the same for the last several years and it’s not changing now”.

Alphabet, Microsoft and Facebook bought stocks worth $8.5 billion, $9.9 billion and $1.2 billion. “We believe a share repurchase program for us appropriately sized is responsible in the current environment based on our capital allocation framework and our cash balance”, said Ruth Porat, Alphabet CFO in a Q1 earnings call.

However, companies in retail or industrial sectors such as Ford Motor, Intel Inc, Pfizer, Mastercard, Starbucks, Dow Inc, 3M, Caterpillar, Merck & co, all have either postponed or suspended their stock buyback program for the current fiscal year.

In the U.S, companies opting for aid under Coronavirus Aid, Relief, and Economic Security Act (CARES Act) are not allowed to precluded from repurchasing their listed equity securities while loans or loan guarantees are outstanding, and for a one-year period following the repayment of the loan or expiration of the loan guarantee.

All four major US airlines namely, American Airlines, Southwest Airlines, Delta Airlines and United Airlines have opted for aid under CARES Act and under the directives, they have suspended their stock buyback programmes.

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