Stock buybacks on Wall Street are at the lowest level since the pandemic

2023-09-17 12:00:55

Wall Street investors

Wall Street

$175 billion…the value of corporate spending in the S&P 500 in the second quarter

Dubai – Al

Published on: September 17, 2023: 02:50 PM GST Last updated: September 17, 2023: 04:00 PM GST

Share buybacks in the US stock market fell to the slowest pace since the Covid-19 pandemic, as rising interest rates undermined the incentive for companies to buy their own shares.

Companies listed in the S&P 500 index in America spent $175 billion on stock buybacks in the three months through June, according to preliminary data from Standard & Poor’s. This represents a 20% decrease from the same quarter last year and a 19% decrease from the first three months of 2023.

Analysts say, according to a Financial Times report seen by Al, that the slowdown is likely to represent the beginning of a long-term trend that may put downward pressure on stock markets.

“Structural reasons, as well as the interest rate environment, are contributing factors,” said Bank of America equity expert Jill Carey Hall. “We expect that repurchases will not be significant in the foreseeable future.”

Corporate buybacks have become an important part of the recent period and can directly support stock prices by increasing demand as well as help improve profitability on an EPS basis by reducing the number of shares outstanding.

However, critics of stock buybacks accuse corporate boards of using them to artificially inflate their stock prices and reward top executives rather than spending on long-term investment or increasing wages for low-wage employees.

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Companies now face a combination of new investment demands and rising borrowing costs, making buybacks less of a priority.

Hall added: “When interest rates were at zero levels, it made sense for companies to issue long-term, low-interest debt and use it to buy back shares. At the same time, companies face increasing pressure to invest in areas such as supply chain reshoring, automation and artificial intelligence, and to reach net-zero targets.” “Zero.”

The decline in share repurchases during the second quarter was exacerbated by the crisis that the banking sector witnessed in March. Many banks increased buybacks in the first quarter after a cautious 2022, with financial groups overtaking the technology sector to become the largest industry to do buybacks for the first time in six years.

However, banks’ share buybacks slowed after the collapse of several smaller lenders raised concerns about the health of the sector, and regulators announced tougher capital requirements.

Buybacks of US stocks have also been subject to a new tax of 1% since the beginning of this year. “At its current level, the tax has not had a significant impact,” said Howard Silverblatt, chief index analyst at Standard & Poor’s. “However, the tax was a rare example of an initiative with bipartisan support, and it is expected to be increased in the coming years, which will “It may put more pressure on spending.”

Some investors, especially in Europe, argue that companies should return capital via dividends rather than buybacks.

Companies counter that buybacks are more flexible and can be easily increased or reduced when conditions change, while a dividend cut often leads to a sharp decline in the stock price.

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