U.S. companies are ramping up share buybacks again, offering potential support to volatile markets.
Share buybacks fell ahead of earnings season, when regulations bar such repurchases. As that so-called blackout period ends, there has been a resurgence, with companies making the most of last month’s selloff. That has eased analysts’ concerns that the year’s buyback boom is over.
Net buybacks in the month totaled just $12 billion by Oct. 19, but jumped to $39 billion by Oct. 29, according to estimates from JPMorgan Chase & Co. That is more than the $30 billion recorded in September and just under the $48 billion recorded in August.
The bank’s estimates are based on the average drop in share count across the S&P 500, FTSE Russell1000, Datastream U.S. and MSCI U.S. indexes.
Some analysts hope a resurgence in buybacks could help support share prices during a period of geopolitical and economic uncertainty. Others are skeptical that companies can continue purchasing their own shares at the current pace, particularly as the stream of repatriated cash that helped drive the year’s buybacks slows down.
“It is possible that some companies saw the equity correction as an opportunity to buy back their stock” in October, said Nikolaos Panigirtzoglou, global-markets strategist at JPMorgan. “But this raises the hurdle for November.”
The pickup came at the close of a month that wiped more than $4 trillion in value from stocks in the U.S., Europe and Asia. Markets have tumbled on concerns over the U.S. trade dispute with China, the prospect of slowing global growth and higher interest rates and declines in the technology sector. The S&P has lost 6.9% in the past month, while the Dow Jones Industrial Average is down 5.6% and the tech-heavy Nasdaq Composite has dropped 8%.
That swoon has accentuated interest in buybacks.
Cosmetics firm Estée Lauder Cos., whose shares dropped by as much as 14% during October, on Wednesday announced plans to buy back 40 million shares, or 11% of the total outstanding. The New York-based company had spent more than $240 million buying back its own stock over October, it said.
Semiconductor-equipment maker Rudolph Technologies Inc., based in Massachusetts, pointed to “undervalued market conditions” on Monday as it announced it had spent $14.3 million completing a buyback plan. The firm’s shares dropped as much as 20% in October.
This past week, International Business Machines Corp. authorized $4 billion worth of buybacks, and financial-exchanges operator Intercontinental Exchange Inc. announced a plan for repurchases worth $2 billion.
Elsewhere, Netherlands-based Royal Dutch Shell PLC spent $2 billion on buybacks between July 26 and Oct. 19. On Thursday, it launched a second round, planning to spend up to $2.5 billion by late January.
Buybacks aren’t loved by everyone. Critics say they are motivated by executives’ desire to boost the value of the stock options and allocations in their remuneration packages. Buybacks also channel profits away from the research and capital expenditure that could improve productivity in the longer term, they say.
“There is an inherent conflict of interest because the management is incentivized through the share price,” said Neil Dwane, global strategist at Allianz Global Investors.
For their fans, buybacks are an efficient way to return capital to shareholders by boosting the share price.
Mr. Panigirtzoglou warned that stock repurchases could now decline because companies may have already taken advantage of the correction and that the repatriation of U.S. profits stockpiled overseas could tail off. Companies’ purchases of their own shares hit new highs in the first half of the year, after December’s tax overhaul motivated firms to repatriate funds. Some of the returning cash has been put toward dividend payments, capital expenditures and bonuses, but a large share has been used to buy existing shares.
Inflows of repatriated cash dwindled to $105 billion in the second quarter from $225 billion in the previous three-month period, according to JPMorgan.
Still, some analysts say there could be more cash to come.
Some companies repatriated offshore capital immediately in response to the tax reform, but others may act more slowly, depending on how their overseas profits are invested, according to Todd Castagno, an equity strategist at Morgan Stanley.
Mr. Castagno pointed out that some corporations hold a lot of their offshore capital as corporate bonds, which are difficult to liquidate.
Cash held overseas by U.S. nonfinancial companies rated by S&P hit $1.3 trillion last year, according to S&P’s own estimates, though that estimate varies wildly between sources.
Data shows U.S. companies have also hit pause on announcing plans to buy back shares in the second half of this year. There is usually a lag between these announcements and the actual share repurchases.
TrimTabs, an investment research company, said that companies announced $156 billion in buybacks in the third quarter, after posting record levels in the first and second quarter of $242 billion and $437 billion, respectively.
Marvell Technology Group, a semiconductor company with a total market capitalization of about $11 billion, for example, announced this past month it would increase its buyback program to $1 billion from $300 million, but set no timetable for the purchases. Chief Financial Officer Jean Hu said management is holding out for prices to sink further.
“We’ll do the buyback opportunistically as we think about the valuation and about the future of the company,” she said.
