Lawmakers have worked hard to try to fight the healthcare and financial implications of the coronavirus pandemic, and one way in which they've sought to address the unprecedented situation is through legislation intended to stimulate economic activity. Included in some proposals are provisions that would provide much-needed assistance to hard-hit industries like restaurants, hotels, and airlines.
Some lawmakers have asked that legislation prohibit companies receiving federal government assistance from returning capital to shareholders in the future. In particular, stock buybacks have become a political hot potato, with many seeing repurchases as a direct transfer of money from the government to private shareholders. Anti-buyback provisions now look likely to make it into the final stimulus package.
Even as investors grow optimistic about the positive impact of stimulus legislation, the near-disappearance of stock buybacks for the foreseeable future could make a longer-term recovery slower than many hope.
How buybacks contributed to 2019's soaring market
It's hard to remember now, but the stock market did extremely well in 2019. Several market benchmarks posted gains of 30% or more, and many individual stocks saw even better returns than that.
Stock buyback activity contributed to the health of the stock market in 2019. In the fourth quarter of 2019 alone, companies in the S&P 500 spent $181.6 billion in repurchasing their shares, according to the latest research from S&P Dow Jones Indices. That wasn't a record -- the year earlier, S&P 500 companies spent a record $223 billion on buybacks -- but it was still up from the third quarter.
For the full year, buybacks totaled $728.7 billion. That was down about 10% from 2018's record $806.4 billion in repurchases, but more than one in five S&P 500 companies saw their share counts fall by 4% or more from year-earlier levels.
The biggest buyers
Some stocks were noteworthy in their buyback activity:
- Apple (AAPL 0.49%) led all companies, spending $22.1 billion on buybacks just in the fourth quarter. That brought its 2019 total to $81.7 billion, capping a decade in which Apple has bought back $342 billion in stock.
- Big banks were also big buyers of their stock. Bank of America (BAC -1.46%) led with $7.7 billion in the quarter and $28.1 billion for the year. Wells Fargo (WFC -2.58%) was close behind with $7.4 billion in the fourth quarter and $24.8 billion in 2019, and JPMorgan Chase (JPM -0.96%) returned $24 billion in 2019 after capping the year with a $6.8 billion repurchase in the fourth quarter.
Overall, technology stocks spent the most as a group, followed by financials and healthcare stocks. That points to the cash-cow nature of the biggest businesses in those industries, as well as the desire among investors to see share prices rise as a result of those buybacks.
Will it all disappear in the coronavirus crisis?
Researchers warn, however, that buybacks are likely to plunge in 2020. Before the COVID-19 outbreak, many experts expected record levels of buybacks in 2020. Now, though, companies face major challenges:
- Most companies will see their business activity curtailed significantly, leaving less free cash flow with which to make stock buybacks.
- Industries that accept federal assistance might need to agree not to do stock buybacks at all in the future, at least for as long as loans or financing remain outstanding.
- Even those companies that can afford to continue buybacks face public criticism, as the perception of share repurchases has turned ugly among the general public.
That combination of factors is likely to make stock buybacks a lot less popular in 2020.
What to watch for
Investors have gotten used to the positive impacts that buybacks have on stock prices. Not only do they provide buying interest that creates demand for shares, but they also reduce the number of shares outstanding. That in turn makes key metrics like earnings per share look more attractive, producing growth even when absolute net income figures aren't rising. Without the hundreds of billions of dollars of repurchases supporting the market, a recovery could be slower than it'd otherwise be.