Fewer companies are planning on buying back their shares as the uncertain economic environment has left firms eager to hold on to their cash.
With the latest earnings season mostly wrapped up, just under 150 companies globally have announced buyback plans while reporting third-quarter results, according to research firm Wall Street Horizon, which looked at 10,000 companies. That’s below over 150 announcements in the second-quarter earnings season.
That’s part of a larger, steady decline. The four-month moving average of quarterly buyback announcements has declined to around 150, from above 200 in the comparable year-ago period, and down from a postpandemic peak of almost 350 in late 2021.
There are a number of factors behind the decline in share repurchases.
First off, companies are facing higher interest rates, which are pushing up corporate borrowing costs and putting the focus on balance sheets. That is pressuring firms to conserve their cash and think twice about buying back stock.
“Executives continue to approach capital allocation decisions with trepidation amid steeply rising costs of capital,” wrote Christine Short, vice president research at Wall Street Horizon. “Cash may continue to become an even more valuable asset until definitive signs of easing financial conditions become apparent.”
Buybacks are great when companies are sitting on excess cash because they reduce the number of shares outstanding—thus increasing the profits each remaining shareholder receives. But when companies have smaller cash piles, they tend to tighten their belts, including when it comes to giving money back to shareholders.
Companies that need to borrow for their operations and long-term investments must do so at elevated interest rates. If profits don’t improve enough, it becomes incrementally more difficult to repay those debts, so management teams will set aside less money for share repurchases.
And in the third quarter, companies’ profit outlooks have not brightened. Aggregate 2023 earnings for the MSCI World Index are expected to grow less than 1% year over year, according to FactSet. Full-year sales for the index are expected to grow in the low single-digits, in percentage terms—a deceleration from 2021’s growth rate, as inflation and higher interest rates eat into global economic demand. Meanwhile, profit margins are dipping as labor and other costs rise, pressuring companies’ bottom lines and in turn limiting buybacks.
Write to Jacob Sonenshine at [email protected]
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