The recession the U.S. has likely just stepped into as a result of the coronavirus is forcing companies to pull back on one action that has buoyed the market for its entire bull run post-crisis: share buybacks.
Companies across many sectors are seeing revenues vanish and are turning their attention away from growth and towards liquidity. Not surprisingly, companies are canceling or reducing some of their stock buyback plans.
And as much as large buyers of stocks have seen their periodic inflows over the years, there’s been one real constant in the market: corporations have been eating up their shares.
“Corporations have been the only net buyer [of stocks] since the Great Financial Crisis,” wrote Canaccord Genuity’s Chief Market Strategist Tony Dwyer in a note.
For most of the 11-year bull run, which began in March of 2009, several actors in the market were indeed net buyers — meaning they bought more value in equities than they’d sold — until the bear market of 2020.
From 2010 to 2019, U.S. corporations saw an increase of 1,400% in net share repurchases, according to Dwyer’s chart. He didn’t disclose if the units of stock bought were shares or dollars. The corporate tax cut from the White House in 2018 perpetuated the trend, which has now fallen by 13% from 2019 to date.
And from 2008 through 2018, non-corporate buyers such as ETFs, mutual funds, hedge funds, pension funds, broker-dealers and households bought a net cumulative $500 billion in stock. During that time, companies bought a net cumulative $4 trillion, a number that is sure to now be reported lower from 2008 to the present.
And then the virus hit.
The S&P 500, at its 2020 low, fell 34% from its all-time high hit in February, as market participants across interests and institutions sold stocks.
Stocks bounced 17.5% from that low, as traders took advantage of technical buy signals and pension plans, many strategists have noted, added some to their longer-term equity portfolios. And pension funds were a huge part of the uptick that took place between March 23 and March 26. On March 16, U.S. pension funds held just 42% of their assets in equities, down from 52% in mid-February just before the bear market began, according to research from a team of Goldman Sachs strategists and macro analysts. Presumably, that allocation is now north of 42%.
Several strategists, including Dwyer, have been quick to note this week that there aren’t many buyers currently in the market, as much of the dip-buying has been done already. That leaves U.S. companies to carry the load again.
But they can’t now.
Three sectors in particular that are reducing their buyback programs are retail, some industrials, airlines and banking.
Wedbush Securities retail analyst Chris Svezia recently moved earnings estimates drastically lower for Dicks Sporting Goods (DKS) - Get Report, Foot Locker (FL) - Get Reportand Under Armour (UAA) - Get Report and said many of his covered companies, which include big players like Nike (NKE) - Get Report will suspend buyback programs. "Our revised estimates take into account many of the evolving global containment efforts, store closures, cash-flow dynamics (liquidity), buybacks suspensions, and workforce furloughs, though the situation continues to evolve on a daily basis,” Svezia said.
Several airline stocks, which are now receiving emergency funding from the government, are suspending buyback programs, with Delta Airlines (DAL) - Get Report recently announcing the suspension of its program.
Banks are doing the same. “In our analysis we assume that they [banks] don’t buy back any shares through 2022,” wrote Goldman Sachs bank analyst Richard Ramadan in a note.
So far, there has been an 8% reduction in 2020 earnings estimates, according to data from Yardeni Research, but that number could fall even more from here. Earnings multiples on the S&P 500 have contracted from 19 times 2020 to just above 15 now, as 2021 is looking bleaker and some companies -- especially already highly indebted ones -- are having trouble accessing what is now expensive debt capital.
Some warn of further downside, a scenario which isn’t helped by companies backing out of the market.