When the stock market and economy are both booming, this is usually the time when publicly traded companies repurchase their shares in massive buy-back programs. Just look at the past 3 years. Companies that make up the S&P 500 Index spent more than $2 trillion buying back their own shares. Over that time period, corporations were buying back so much stock that they were the single largest source of demand for US stocks.
There is no problem with companies repurchasing their shares. When done intelligently, share repurchases are a powerful tool for creating value for shareholders. But the problem is that companies, in general, do not repurchase shares intelligently. Actually, the opposite is the case.
These companies are most aggressive with their buybacks when their stock prices are high and therefore at the worst possible time. And then, when economic difficulties appear and share prices go south, these companies stop buying back their shares. Sometimes the same companies that were repurchasing shares at high prices end up issuing shares at low prices after the market has tanked. Why would they do this?
US investment bank giant Goldman Sachs just released a report that indicates that share repurchases are expected to decline by 50% during 2020.
Big blue-chip companies like McDonald’s, AT&T, Nordstrom, and all of the big banks have completely suspended their repurchase programs even though their share prices are down. The reason these companies have to stop repurchasing shares when their shares are actually great bargains is that they spent all their money repurchasing shares when stock prices were much more expensive.
So, why are companies not patient when the economy is doing well and stock prices are high? They should wait for better opportunities, when prices are low, undervalued, and therefore a bargain.
CEO’s have to think like investors when spending the company’s capital on share repurchases. Share repurchases aren’t meant to be the default option for companies to use excess cash on when they don’t know what else to do with it. Share repurchases are meant to be done opportunistically when a share price actually represents good value.
Sven Franssen