Buybacks soar as companies eye Ukraine and other sources of volatility

When Amazon announcement a $10 billion share buyback plan earlier this month, it was just one of many large companies whose response to the war in Ukraine and other causes of economic volatility led buybacks to a record.

“Amazon’s management is looking to inspire new confidence,” Russ Mold, AJ Bell’s chief investment officer, said in a statement. Reuters report.

In addition to the buyout, which will take place before a board vote at the end of May, the company also announced a 20-to-1 stock split, which will help make their shares more attractive to fence custodians who are put off by high exchange rates. share the prices.

Record redemptions

Share buybacks are on track exceed last year, itself a big year for them. In the first two months of 2023 alone, the companies announced plans to repurchase nearly $240 billion in stock, putting it on track to beat the fourth quarter of 2021, itself a record high.

The war in Ukraine, along with the prospect of interest rate hikes by the Federal Reserve and rising commodity prices, which are already high, are creating the kind of volatility that has led to a S&P 500 down 12% since the beginning of the year. By buying back their own shares, companies make their shares more attractive to existing investors and signal that management has confidence in the company’s position despite the uncertainty.

“It adds a layer of overall support during periods of volatility,” Anthony Saglimbene, global market strategist at Ameriprise Financial, told the Wall Street Journal.

PepsiCo, Inc., Union Pacific Corp. and industrial gas giant Linde PLC are among the big companies that have announced takeovers since the start of the year. Best Buy and Colgate-Palmolive are two others.

Goldman Sachs thinks buybacks could total $1 trillion this year, up 12% from last year.

“The scale of buyout activity is near an all-time high, with the number of active programs doubling the usual figure,” the Journal reported.

Many large, cash-rich companies are well positioned to buy back their shares.

“S&P 500 companies have roughly the same amount of cash now that they ended 2020 with,” Investors Business Daily reported. By some estimates, this is equivalent to $2.7 trillion.

That’s enough money to give “$8,131 to every man, woman, and child in the United States,” the report calculated.

Favorite investment

Congressional lawmakers and Biden administration policymakers have tried to dampen corporate enthusiasm for buyouts, saying the money would be better spent on productive investments. Late last year, the Securities and Exchange Commission (SEC) proposed a rule requiring companies to explain the rationale for their takeover plans, in part to ensure investors have a chance to decide whether the decision makes sense. strategic.

“I believe we can reduce information asymmetries between issuers and investors by improving the speed and granularity of information provided by today’s proposal,” the SEC Chairman said at the time. Gary Gensler.

House and Senate lawmakers have introduced bills to impose a tax on buyouts as part of an effort to curb them, though the chances of the legislation passing this year dim with the prospects of the initiatives. milestones of the Biden administration, such as the Build Back Better Infrastructure Pack.

Executives say efforts to rein in takeovers make little sense, given the difficulty of increasing productivity when supply chain constraints and historically difficult working conditions make large expansions difficult. In short, even if they wanted to spend the money instead of buying their own stocks, they can’t do it easily.

CFOs say they are already investing as much as they can in talent, new facilities and other productivity measures. There simply isn’t the capacity to invest more, no matter how badly legislators want it to be.

“We invest as much as the business can absorb,” Dave Denton, chief financial officer of the Lowes homewares store, said. “The [are] there are only a limited number of projects we can undertake.