2018 and 2019 shattered all-time records for corporate stock buybacks.
It’s not surprising that the number fell during the first half of 2020.
But now they’re back.
As part of the Federal Reserve and the government’s response to the pandemic, they made trillions of dollars available to large corporations. This included government- and Fed-backed loans, Fed purchases of corporate bonds, and lines of credit for publicly traded companies.
The aim of all this was to give companies maximum flexibility in dealing with the pandemic.
The net effect is dozens of publicly traded companies are swimming in cash. And now that we’re potentially seeing a light at the end of the COVID-19 tunnel – most investors seem to be betting on a vaccine being available in early 2021 – some companies are putting that cash to use.
How? By buying back stock shares from investors.
In one way, it may seem like an odd time to do so. The Nasdaq and the S&P 500 are both sitting near all-time highs. That makes it expensive for companies to buy back their own shares.
However, in terms of stock prices and the indexes, things aren’t all they may seem.
It’s important to remember that more than half of the points the Nasdaq has gained since the March low are from just five companies: Facebook, Apple, Tesla, Amazon, and Google.
Even as the index reaches all-time highs, fewer than half of the companies in the Nasdaq-100 are sitting at all-time highs.
That means it’s actually a fairly narrow band of stocks driving up the nominal point value of stocks. This leaves many stocks in the Nasdaq and S&P 500 well below all-time-high valuations. By those standards, individual stock buybacks likely make more sense.
After all, companies have access to cheap cash right now. Borrowing money is cheaper than it’s ever been. So with the low cost of capital, taking back voting shares and lowering future dividend costs by buying back shares makes even more sense.
As long as the flow of capital is plentiful and COVID-19 doesn’t take some major turn for the worse, we should continue to see more stock buybacks. This has helped push stocks higher. Of course, in order for stock prices to stay high, we need company fundamentals (sales and profits) to bounce back quickly.
We’ll see how that turns out during the rest of the second half of this year.