Stock buybacks, a key lever for increasing shareholder value at many companies, have been on the wane during the coronavirus pandemic, and a new study gives details.
Nearly 50 companies across the U.S. have suspended plans to buy back shares in order to preserve cash for what could be coming down the road, Goldman Sachs estimates.
The firm's research department said that roughly $190 billion in stock buyback plans have been cut by S&P 500 companies, or roughly 25% of last year's buyback total.
"Reduced cash flows and select restrictions mandated as part of the Phase 3 fiscal legislation suggest more suspensions are likely," Goldman Sachs strategists wrote in a note to clients, according to Financial Advisor. "Higher volatility and lower equity valuations are among the likely consequences of reduced buybacks."
In a buyback, companies purchase their own shares from the market, reducing the amount of outstanding shares in circulation and thus increasing the value of each remaining share.
The decrease in stock buyback plans is a huge hit to future shareholder value.
Stock buybacks by U.S. firms made up about 70% of cash returned to shareholders in the year ending June 2019, according to Morgan Stanley. In Europe, where companies returned about $100 billion in cash through buying back shares, it accounted for roughly 30%.
"The problem for the U.S. equity asset class is that it began the downturn so overvalued at a record high valuation to sales," Chris Wood, global head of equity strategy at the investment banking firm Jefferies, wrote in a note to clients last week. "The other problem is that the leveraged share buyback game has ended, which also means an end to the phony earnings growth it produced."