How Bleak Are Things For Buyback ETFs Amid Coronavirus Crisis
Zacks Investment Research | Mar 19, 2020 01:00AM ET
Share repurchases and dividend payments are two popular tools used by companies to maximize shareholder value. President Donald Trump’s tax reform has aided these corporate actions in recent years.
About 22.8% of the companies took the buyback route in the third quarter of 2019 to reduce their share count by at least 4% and boost their earnings per share. The proportion of the companies was higher than 17.7% noted in third quarter of 2018.
However, the coronavirus-led cash crisis among corporations put a temporary embargo onthe trend. Notably, 23 companies in the S&P 500 have put their programs on hold so far this year as compared to none in 2019, per equity research firm Birinyi Associates, as quoted on Wall Street Journal. Also, companies’ future buybacks authorization through Mar 17 marked a 39% year-over-year decline.
Banks Announce Brief Suspension of Buybacks
Eight big U.S. banks — Bank of America (NYSE:BAC) , Bank of New York Mellon (NYSE:BK) , Citigroup (NYSE:C) , Goldman Sachs (NYSE:GS) , JPMorgan Chase (NYSE:JPM) , Morgan Stanley (NYSE:MS) , State Street (NYSE:STT) and Wells Fargo (NYSE:C) — suspnded share buybacks temporarily for the rest of the first quarter and the second quarter of 2020 as the coronavirus crisis roiled businesses and in turn markets. Many other U.S. banks have also decided on the same.
Oil Firms to Cut Buybacks to Save Up on Dividend Payouts?
Energy companie are known for high dividend payments. Exxon Mobil Corp. (NYSE:XOM) yields 10%. The Anglo-Dutch Royal Dutch Shell (LON:RDSa) Plc hasn’t cut dividend payments since World War II, and currently offers around 14% yield. BP Plc (NYSE:BP) and France’s Total SA (PA:TOTF) yield about 13.27% and 11%, respectively, per Bloomberg . Amid the ongoing oil market rout, maintaining the huge dividend payouts is a tall order.
Occidental Petroleum (NYSE:OXY) has announced a cut in its quarterly dividend payout for the Oil Firms May Cut Dividends Ahead: ETFs & Stocks in Focus ).
more discretionary ”) to save dividends.
A Few More Potential Halts in Buybacks
U.S. airlines companies — the worst hit by coronavirus — have now been asking for about a $50-billion bailout but have 96% of free cash flow last decade on buybacks, per Bloomberg.
Had that cash been lying with big airlines, they wouln’t have required bailout funds today, opine analysts. Airlines will probbaly still receive the emergency aid but the ongoing crisis and Wall Street analysts’ view on airlines’ reckless spending will likely limit their buyback spree.
Any Silver Lining?
Get The News You Want
Yes, there is. After a devastating market crash, stocks of many companies with strong fundamentals are now available at low prices. Businesses with decent liquidities will likely repurchase more of those stocks.
Per Wall Street Journal , companies such as Chinese e-commerce giant JD.com Inc. (NASDAQ:JD) , business software company Oracle Corp (NYSE:C) , building-products maker Patrick Industries Inc. (NASDAQ:PATK) and real-estate investment trust NexPoint Residential Trust Inc. (NYSE:NXRT) have authorized stock repurchases lately.
ETF Performance
Having said this, we would like to note that overall sentiment in the buyback space is likely to be grim till the summer months. Pureplay buyback ETFs like Invesco Buyback Achievers Portfolio SPYB (down 32.8%) have underperformed the broader S&P 500 index (down 25.2%) in the past month (as of Mar 17, 2020). The trend for buybacks is expected to remain grim in the near term.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Zacks Investment Research
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.