US companies are rushing to buy back large volumes of stocks to take advantage of recent stock market volatility and reassure investors of slowing growth.
A record $319 billion in new share buybacks have been authorized so far this year, according to Goldman Sachs data, with a growing number of companies using ‘fast track’ deals to buy large volumes the most quickly as possible while their stock prices are depressed. There were $267 billion in share buybacks at the same time in 2021.
Even newly listed companies, which traditionally spend money to fuel growth rather than return surplus to shareholders, have joined the trend after sharp declines in their stock prices made buyouts more attractive.
“The breadth of different industry groups buying stocks is the highest we’ve seen in a few years, and volumes have been increasing,” said Michael Voris, head of structured equities at Goldman Sachs. “It’s much more down to the market backdrop than anything else.”
Management teams use share buybacks to support demand for their shares and increase their profitability in terms of earnings per share by reducing the number of shares outstanding.
The average stock in the broad Russell 3000 Index has lost more than 30% of its value so far this year, allowing companies that believe their stock is undervalued to buy more at the same price. Earnings growth is also expected to slow as groups battle rising inflation and supply chain issues, increasing the appeal of buyouts as a way to flatter profits.
“Ironically, buyout activity tends to pick up in periods of volatility because there’s a downdraft and so people with money are looking at their opportunities,” said Craig McCracken, co-head of equity markets. equity at Wells Fargo. “It’s a sign of the underlying strength, that companies expect things to continue to be quite positive, so they’re using their money to buy back stocks instead of keeping it on the balance sheet.”
In addition to increased clearances — which can take several years to materialize — companies have publicly announced more than $33 billion in so-called accelerated share buybacks, according to analysis of company filings compiled by Sentieo. ASRs allow them to buy back large volumes in a few months.
“Accelerated buybacks send a strong signal to shareholders because money is committed to buying back shares ahead of time,” Goldman’s Voris said.
The total is already almost four times the amount reported in the first quarter of 2021 and is expected to rise further as companies begin reporting their first quarter results next month.
ZipRecruiter, which went public less than a year ago through a direct listing, said “investing in undervalued stocks is an attractive option” when it announced a $50 million ASR last week. . Shares of the company have fallen more than a quarter from their peak at the end of last year.
Another recently listed company, fintech lender Upstart, launched a $400 million buyout program just 14 months after its IPO.
The surge in buyouts provided a rare bright spot for investment banks’ equity capital markets business, which suffered a sharp drop in fees due to a slowdown in IPOs and other fundraising activity. capital.