A Santa Claus Rally in Buybacks? A Record Year Shaping Up

 | Nov 02, 2022 09:09AM ET

  • This earnings season has seen its share of volatility amid macro uncertainty, yet companies continue to authorize share repurchase programs

  • Last year was a record in total dollars used to buyback stock, but 2022 looks to take the top spot ahead of the new 1% buyback excise tax starting in January

  • With the buyback blackout period ending for many major companies, will the stage be set for a big late-year rally?

    • If in doubt, authorize a share repurchase program. That has been a mantra this Inflation Reduction Act earlier this year. The controversial piece of legislation included a 1% excise tax on stock repurchases, but the policy does not take effect until January. So, the logic goes that firms might pull forward buybacks into 2022 to avoid the modest penalty. Could that be a bullish catalyst heading into the usually-strong November-December period? Might it even set up the market for a super-Santa Claus rally? Place your bets now.

    Decisions, Decisions

    As if there wasn’t enough going on with stock buybacks, CFOs now face a much different capital allocation situation from a year ago. Consider that the risk-free rate is no longer zero and the cost of debt for high-grade firms is near 6% - the highest since 2009. For companies with ratings below investment grade, the interest rate on new paper might be above 10%. Corporate finance 101 teaches that the weighted-average cost of capital is simply a blend of debt and equity (common and preferred). Buying back stock might effectively raise the debt financing component, which is not cheap any more.

    In fact, the latest Bank of America Global Fund Manager Survey reveals that investors prefer execs use cash flow to shore up balance sheets significantly more than return cash to shareholders (via buybacks, dividends, or M&A).

    Corporate Cash: Emphasis On Improving Balance Sheets