Even as many firms retain more cash to cushion against the risk of future cash flow shocks, we do not expect buyback activity to stop completely. Among the top three sectors for buybacks in 2019, we believe buybacks in the IT sector are most likely to continue, if at a reduced level. The IT sector boasts the highest levels of free cash flow, those cash flows tend to be predictable and IT firms currently hold relatively large cash balances.
The outlook for continued buybacks in the Financial sector is uncertain at best. Large US banks bought a very large number of shares in 2019, for two main reasons: Most large banks were at or above their required capital levels, and their credit losses were low. COVID-19’s economic impact
could change this picture completely. Strong and well-capitalized banks also recognize their role in supporting economic activity through the crisis. In March, for example, eight major US banks, including State Street, announced a pause in buybacks through July, stating that they planned to use the cash to support the economy through lending and other services.8
Of the sectors with the most active buyback programs last year, the Energy sector’s prospects for share repurchases are now most at risk. Energy firms on average have generated relatively small cash flows, instead funding their buybacks using debt proceeds. As their cash flows are jeopardized by the price war between Saudi Arabia and Russia and a decrease in demand, energy companies are likely to conserve available cash to shore up their balance sheets. Other US sectors are very likely to tighten their buyback belts, including airlines, which have already signaled their willingness to accept a temporary ban on buyback activity in exchange for bailout relief. Airlines had about a 2% buyback yield last year.9