Companies that buy back shares enjoy a discount as markets fall

Companies that buy back their shares get more for their money as market declines depress share prices, helping to fuel buyback activity, which is expected to hit a record $1 trillion this year.

S&P 500 companies that have reported first-quarter results so far spent $269 billion on buybacks in the period, up 58% from a year earlier, according to data provider S&P Dow Jones Indices.

Buybacks hit a new high of $972 billion during the 12-month period ending in March, S&P Dow Jones Indices said, up from $499 billion during the year-earlier period.

Share prices of many US companies have plunged 15% to 30% since the beginning of the year, as interest rate hikes, high inflation, the Russian invasion of Ukraine, and slowing economic growth in the US, China and elsewhere have investors worried.

The S&P 500 is down more than 18% through May 20, while the Dow Jones Industrial Average is down about 15% year to date. The Russell 2000 has taken a hit of more than 21% since the beginning of January, according to FactSet,

a data provider.

But this is not entirely bad news for companies with excess cash. Falling share prices allow them to buy back more of their own shares, reducing the number of shares and increasing earnings per share, a metric closely watched by investors.

More than 17% of S&P 500 companies that bought back shares in the first quarter had a share count at least 4% lower than a year earlier, compared with 5.8% of such companies a year earlier, it said. S&P Dow Jones Indices.

Buybacks of S&P 500 companies in the first quarter generated a return of 2.54%, down from 1.48% a year earlier and down from 3.37% in the first quarter of 2020, when share prices fell during the first days of the pandemic. These returns are calculated by comparing the market capitalizations of companies and the volume of buybacks they executed.

“As prices have fallen, those purchases should create a tailwind for EPS,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “You have some bargain hunting here.”

Network equipment manufacturer Cisco Systems Inc.

is one of the companies that is considering buying back shares because prices have dropped.

“Looking at where our stock price is, it looks like there’s going to be an opportunity to do it more aggressively,” said Scott Herren, Cisco’s chief financial officer.

Cisco generates about $12 billion to $14 billion in free cash a year and allocates about $6 billion to dividends, leaving the rest to invest in the business and buy back shares. Cisco shares closed at $42.84 on Friday, down about 32% year-to-date.

LoanTree INC.,

which operates an online marketplace for loans and other financial products, has also been buying back shares, including $43 million of its shares in the first quarter, down from $40 million in the fourth quarter of 2021. “Our price has gone down, along with everyone else,” said Trent Ziegler, the company’s chief financial officer.

LendingTree has an inside view of how you expect your business to perform, which informs management’s view of how much the company’s stock should be worth. “If we feel like the stock is out of whack in the market, and we can buy it and get attractive returns, then that’s a good use of cash,” Ziegler said.

Shares of the company closed at $62.95 on Friday and have nearly halved since the beginning of the year. Ziegler declined to comment on how he thinks LendingTree shares should be valued.

eastman chemistry Co.

it recently signed an agreement to buy back $500 million of its shares after a similar transaction in late 2021, following two divestitures that brought in about $1.8 billion. The specialty chemicals company regularly buys back shares, Chief Financial Officer William McLain said.

“In this environment, we feel we are undervalued and the share buyback is a good opportunity,” he said. Eastman shares closed at $101.96 on Friday, down 14.7% from the beginning of the year.

Finding the right time to buy back shares is a difficult task for executives and they rarely get it right, advisers and analysts say.

“A lot of the buybacks are being done by companies that shouldn’t be doing it,” said Greg Milano, chief executive of Fortuna Advisors, which advises companies on capital allocation. Companies should consider buybacks after investing in their business, raising dividends and paying down debt, Milano said.

“Very few companies have a truly objective way of deciding whether to increase or decrease buybacks,” he said.

Some buybacks are not related to stock market declines. house deposit Inc.

it has about $7 billion left under an existing share repurchase authorization that the home improvement retailer plans to use, chief financial officer Richard McPhail said.

“We return excess cash to shareholders as we have it,” McPhail said. “We tend not to think about timing the market.”

Home Depot reported more than $38 billion in revenue in the first quarter, up 3.8% from the same period a year ago. Its shares closed at $287.19 on Friday, down 30% so far this year.

Some companies also repurchase shares to offset dilution from stock plans that allocate shares to executives as part of their annual compensation, resulting in a higher number of shares over time.

Falling markets and other recent events are prompting executives to review frameworks to guide buybacks. “In today’s market, valuations move so fast that we continue to readjust expectations and analyze,” said Christopher Halpin, chief financial officer of IAC/InterActiveCorp..

The Internet and media business has about 8 million shares left to buy back under an existing authorization.

Some companies, including Starbucks corporation

, in recent months suspended multibillion-dollar share buyback programs to free up cash. Howard Schultz, who returned as interim CEO in April, said in a letter to employees that the coffee chain would stop buybacks and focus on investing in employees and stores.

“Given the change in valuations, I’m sure every company is looking at this,” said Wetteny Joseph, chief financial officer of animal health company Zoetis. INC.,

referring to planned share buybacks.

Zoetis prioritizes investments in internal projects and business development, but is considering buying back more shares after buying back $361 million worth of shares in the first quarter, Joseph said. Zoetis’s board authorized a new $3.5 billion share buyback program in December, when market valuations were higher.

write to Nina Trentmann at Nina.Trentmann@wsj.com

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