Companies Buying Back Stock Enjoy a Discount as Markets Tumble
Companies that repurchase their shares are getting more bang for their buck as market declines depress stock prices, helping to boost buyback activity, which is expected to hit a record $1 trillion this year.
S&P 500 companies that have reported first-quarter results so far spent $269 billion on buybacks in the period, up 58% from a year earlier, according to data provider S&P Dow Jones Indices.
Buybacks reached a new peak of $972 billion during the 12-month period ended in March, S&P Dow Jones Indices said, up from $499 billion during the prior-year period.
Share prices of many U.S. businesses have slumped between 15% and 30% since the beginning of the year, as interest-rate increases, high inflation, Russia’s invasion of Ukraine and slowing economic growth in the U.S., China and elsewhere worry investors.
The S&P 500 is down about 17% through Monday, while the Dow Jones Industrial Average is roughly 12% lower year to date. The Russell 2000 has suffered a more than 21% hit since early January, according to
a data provider.
But this isn’t entirely bad news for companies with excess cash. Sinking stock prices are letting them buy back more of their own shares, reducing share count and boosting earnings per share, a metric watched closely by investors.
More than 17% of S&P 500 companies that bought back stock in the first quarter had a share count at least 4% lower than a year earlier, compared with 5.8% of such companies a year earlier, S&P Dow Jones Indices said.
Buybacks by S&P 500 companies in the first quarter generated a yield of 2.54%, up from 1.48% a year earlier and down from 3.37% in the first quarter of 2020, when share prices fell during the early days of the pandemic. These yields are calculated by comparing companies’ market capitalizations and the volume of buybacks they executed.
“As prices have declined, those purchases should result in a tailwind for EPS,” said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. “You have some bargain hunting here.”
Network equipment maker
Cisco Systems Inc.
is among the companies considering buying back shares because prices are down.
“Looking at where our share price is, it feels like there will be an opportunity to do that more aggressively,” said
Cisco’s chief financial officer.
Cisco generates about $12 billion to $14 billion in free cash a year and allocates around $6 billion of it toward dividends, leaving the remainder for investing in the business and buying back shares. Cisco’s shares closed at $43.35 on Monday, down about 32% year to date.
which operates an online marketplace for loans and other financial products, also has been buying back stock, including $43 million worth of its shares in the first quarter, up from $40 million in the fourth quarter of 2021. “Our price is down, along with everybody else,” said
the company’s CFO.
LendingTree has an internal view on how it expects its business to perform, which informs management’s view on what the company’s shares should be worth. “If we feel like the stock is dislocated in the market, and we can buy it and earn attractive returns on it, then that’s a good use of cash,” Mr. Ziegler said.
The company’s shares closed at $59.95 on Monday and have more than halved since the beginning of the year. Mr. Ziegler declined to comment on how he thinks LendingTree’s shares should be valued.
Eastman Chemical Co.
recently entered into an agreement to repurchase $500 million worth of its shares after a similar transaction at the end of 2021, following two divestments that brought in about $1.8 billion. The specialty chemicals company buys back shares on a regular basis, CFO William McLain said.
“In this environment, we feel that we are undervalued and that buying back stock is a good opportunity, he said. Eastman shares closed at $103.27 on Monday, about 15% lower than at the beginning of the year.
Finding the right time to buy back stock is a tricky task for executives and they rarely get it right, advisers and analysts say.
“A large chunk of buybacks are done by companies that shouldn’t do them,” said Greg Milano, chief executive of Fortuna Advisors, which advises companies on allocating capital. Companies should consider buybacks after investing in their business, increasing dividends and paying down debt, Mr. Milano said.
“Very few companies have a truly objective way of deciding whether to increase or decrease buybacks,” he said.
Some buybacks are unrelated to stock market declines.
Home Depot Inc.
has about $7 billion left under an existing share-repurchase authorization that the home-improvement retailer plans to use, CFO
“We return excess cash to shareholders as we have it,” Mr. McPhail said. “We tend not to think about timing the market.”
Home Depot reported about $39 billion in first-quarter revenue, up 3.8% from the prior-year period. Its shares closed at $286.03 on Monday, down about 31% so far this year.
Some companies also buy back shares to offset dilution from equity plans that allocate shares to executives as part of their annual compensation, resulting in a higher share count over time.
Slumping markets and other recent events are prompting executives to review frameworks for guiding buybacks. “In the current market, valuations move so quickly that we continue to reset expectations and analyze,” said Christopher Halpin, the CFO of
The media and internet business has about 8 million shares left for repurchasing under an existing authorization.
Some companies, including
, in recent months suspended billion-dollar share-buyback programs to free up cash.
who returned as interim chief executive in April, said in a letter to employees that the coffee chain would halt buybacks and focus on investing in employees and stores.
“Given the shift in valuations, I am sure every company is looking at this,” said
CFO of animal-health company
referring to planned share buybacks.
Zoetis gives priority to investments in internal projects and business development, but it is considering whether to repurchase more shares after buying back $361 million in shares in the first quarter, Mr. Joseph said. Zoetis’s board authorized a new $3.5 billion share repurchase program in December, when market valuations were higher.
—Kristin Broughton contributed to this article.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
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