Corporate share repurchases can be a reliable contrarian indicator. When companies are buying back stock aggressively, it is likely time to sell and when companies stop repurchasing shares, it is likely time to buy. Corporate buyback are ill-timed a high percentage of the time.
Just look at US banks as an example:
According to second quarter earnings for U.S. banks, many are shutting down their rate of share repurchases. During the second quarter of 2022, the 6 largest U.S. banks repurchased a total of $5.1 billion worth of stock. That’s just 29% of the $17.5 billion worth of stock that the same 6 banks repurchased in the first quarter of this year, a big reduction in buybacks.
The share prices of stocks in the banking sector have dropped steadily throughout the year. That means these companies were buying aggressively when share prices were high and now that share prices have declined and offer better valuations, the banks are buying much less of their own stocks. That’s exactly the opposite of what you’re supposed to do.
For the remainder of the year, U.S. banks will be buying even less. JPMorgan Chase and Citigroup indicated that they’re putting share repurchases on hold. So they bought high instead of low, but corporate stock buybacks should be the smart money in the market. Instead, they are the opposite.
The reality is that when the economy is great and share prices are high, the big banks as well as most other public companies buy back stock aggressively but when share prices are high, they should be putting cash in the bank and waiting for the next downturn so that they can repurchase stock at great valuations. But this is not what they generally do.
I believe the usual investor can be smarter than that and use this irrational behaviour as a contrarian buy-and-sell indicator. Bank stock prices have moved down. That means bank valuations against book value and earnings have also moved down. With other words: the banking sector is getting attractive again. Just look at Citigroup, a bank stock trading at a book value as little as 50%.
Sven Franssen