Why The Buyback Trend Could Be Bucked

Why The Buyback Trend Could Be Bucked
Paul Allison, CFA

about 1 year ago2 mins

Mentioned in story

Share buybacks have been climbing for two decades, and this year, according to Goldman Sachs, they’ll soak up around 50% of the average firm’s total available cash. That’s compared to the 36% the average firm will spend on reinvestment – in the form of capital spending (capex) or research and development (R&D) – and the 13% it’ll spend on acquisitions. But buybacks are controversial – and for good reason. They don’t create shareholder value – meaning they don’t contribute to a firm’s profit growth. If companies use up their cash to repurchase shares instead of funneling it into projects to grow sales and profit, then sooner or later they’ll hit a snag. That’s not really been the case in recent times, as most firms have been enjoying bumper cash flow harvests, and using cash to mop up share buybacks after things like reinvestment or acquisitions. But there are a few reasons to think that buybacks might get de-emphasized next year.

Firstly, faced with the choice of using leftover cash to buy shares or leaving cash in the bank earning near-zero interest, it hasn’t been a tough choice in recent years. Now, with the prospect of earning better returns on parked cash, firms might think twice before funneling every penny into share repurchases.

Secondly, US firms are probably looking at slower revenue growth over the next year or so, and some – Big Tech – are facing the prospect of an age-related permanent slowdown. So it wouldn’t be a huge surprise if more growth-oriented investments, or even M&A, take center stage next year.

Lastly, companies that use debt to fund themselves might be staring down the barrel of higher financing costs if interest rates stay higher for longer. So debt repayment might suddenly leapfrog buybacks on the cash spending priority list.

Buybacks aren’t likely to fall completely out of favor, but they may get a lot less attention in 2023 as firms consider more pressing needs for all that cash.

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