Stock Buybacks Through the Lens of the COVID-19 Crisis
Companies with strong market positions are likely to continue buying back their shares through this crisis, but at a reduced scale.
This reduction in buyback activity could have substantial consequences for equity investors and for the economy as a whole.
In the aftermath of the crisis, a wide range of capital projects aimed at addressing newly revealed vulnerabilities will likely compete with buybacks for available cash.
The crisis may also accelerate the incorporation of social considerations in buyback decision making.
In the years following the Global Financial Crisis, companies in developed markets (DM) have returned record amounts of cash to shareholders in the form of stock buybacks and dividend payouts. Equity investors have benefited greatly from this trend. As economic activity grinds to a halt amid the COVID-19 pandemic, the time seems right to assess which industry sectors benefited the most from share repurchases, which sectors are now most vulnerable as a result — and which are the best positioned, in terms of available cash, for a future recovery.
In recent years, buybacks have consumed around one-quarter of DM companies’ operating cash flows across sectors.1 Cheap credit in the aftermath of the GFC has also fueled the buyback trend, as some companies borrowed to fund buyback activity (see Figure 1).