- Wednesday, October 16, 2024
According to research firm Wall Street Horizon, the number of companies planning to buy back their shares has significantly decreased due to the current uncertain economic environment. During the latest earnings season, around 150 companies globally announced their buyback plans while reporting their third-quarter results. This number is lower than the over 150 announcements made during the second-quarter earnings season.
This decline in share repurchases is part of a larger trend. The four-month moving average of quarterly buyback announcements has dropped to approximately 150, down from over 200 during the same period last year. This is also a decrease from the post-pandemic peak of almost 350 in late 2021.
Several factors contribute to this decline in share repurchases. One significant factor is the higher interest rates that companies are facing. These increased rates lead to higher corporate borrowing costs, making companies more cautious about their cash reserves and more hesitant about buying back their own stock.
"Executives continue to approach capital allocation decisions with trepidation amid steeply rising costs of capital," stated Christine Short, Vice President of Research at Wall Street Horizon. Until definitive signs of easing financial conditions become apparent, cash will remain a highly valuable asset for companies.
The Impact of Buybacks on Shareholders' Profits
Buybacks have long been seen as a beneficial strategy for companies with excess cash. By reducing the number of outstanding shares, buybacks ultimately increase the profits that each remaining shareholder receives. However, when companies experience a shortage of cash, they often tighten their belts, including reducing or eliminating share repurchases.
One factor contributing to this shift is the elevated interest rates associated with borrowing for operational and long-term investments. If a company's profits fail to improve significantly, it becomes progressively more challenging to repay these debts. Consequently, management teams prioritize setting aside less money for share repurchases.
Unfortunately, the profit outlook for companies remains dim in the third quarter. According to FactSet, the MSCI World Index projects less than 1% year-over-year growth in aggregate 2023 earnings. Furthermore, full-year sales for the index are expected to increase only in the low single digits, reflecting a deceleration from 2021's growth rate. This slowdown arises from factors such as inflation and higher interest rates diminishing global economic demand. Compounding the issue, rising labor and other costs are squeezing profit margins, leading to further limitations on buybacks.
In summary, while buybacks can be advantageous for shareholders when companies have surplus cash, tighter financial circumstances necessitate a more restrained approach. With profit growth expectations slowing and costs rising, companies are forced to scale back their share repurchases and focus on other financial obligations.
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