Demonizing Corporate Buybacks a Bad Idea, Canaccord’s Dwyer Says
Demonizing Corporate Buybacks a Bad Idea, Canaccord’s Dwyer Says
(Bloomberg) -- As the stock market continues to test new lows, one strategist said powering down its single biggest buying engine may be a mistake.
The U.S. equity market is back in the red this week, as investor optimism around the stimulus plan ran its course and fresh concerns about the novel coronavirus outbreak took hold. With buyers getting scarce, Canaccord Genuity equity strategist Tony Dwyer warned that it’s a “bad idea” to demonize the only buyer left.
He is referring to the corporate buybacks that have drawn much criticism from politicians in recent days.
The strategist said the current weakness -- the S&P 500 Index is down about 6% since Monday’s close -- reflects traders taking profits on purchases since the previous Monday’s lows, wary individual investors pondering their economic future, and most importantly, nearly every major company preserving cash by halting their share buyback programs. At the same time, politicians including Joe Biden, Elizabeth Warren and Bernie Sanders have joined the public outcry against corporate share repurchase programs.
Companies that will receive government aid as part of the stimulus plan passed last week are also banned from buying back their own shares until a year after their have paid taxpayers back.
“The politicians and the need for cash have just literally removed the only buyer from the marketplace as we head into the heart of the Covid-19 crisis and economic shutdown,” the strategist said.
Share buybacks by companies have long come under fire as critics argued that the money could instead be put to better use by investing in growth and in workers. With the Covid-19 pandemic disrupting businesses and bringing sectors including airlines to their knees, some critics say these companies may not have needed a bailout, or at least as much, if they had held on to the cash instead of buying stock and returning money to shareholders.
The airlines and planemaker Boeing have probably faced the brunt of this criticism. After spending billions buying back its stock, enriching big investors, Boeing “is trying to take Congress hostage by demanding $60 billion in a no-strings-attached, taxpayer-funded bailout,” Sarah Miller, executive director of the American Economic Liberties Project, which is opposed to the company receiving aid, said last week.
Dwyer, however, quoted data from BReynolds Strategy to point out that since the financial crisis of 2008, the rise in the markets has been fueled by trillions of dollars in net share repurchases by S&P 500 companies.
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