Buyback volume drops to five-year low in Covid-19 aftermath

In the immediate aftermath of the Covid-19 outbreak, share buybacks in the US dropped to their lowest level since before the passage of the Tax Cuts and Jobs Act of 2017, according to a new study by Fortuna Advisors.

Between Q1 and Q2 2020, the volume of buybacks fell by 55 percent, from $194 bn to $88 bn. This is the largest decline in buyback volume in more than five years, according to Fortuna Advisors’ analysis.

‘In the face of [Covid-19], companies conserved cash, which meant fewer buybacks,’ the report authors write. ‘Indeed, the total dollar amount committed to share repurchases in 2020 dropped to levels not seen since 2016, before the Tax Cuts and Jobs Act of 2017 reduced the tax burden on repatriating foreign earnings. As the economic recovery began to take shape toward the end of 2020, buybacks ticked up, but were still down 27 percent year over year.’

In 2018, US companies’ buyback programs totaled a record high of more than $1 tn. The figures fell slightly in 2019 but 2020 was showing signs of growth: Q1 2020 buybacks stood at $194 bn, which exceeds each of the last three quarters of 2019.

But Q2 2020 shows the effects of the pandemic, with corporate buybacks falling to $88 bn. ‘Buybacks declined much more steeply than other forms of capital deployment during 2020,’ write the report authors.

The report does note that there was a ‘muted recovery’ in Q4 2020 as buybacks rose to $127 bn but this is still below the levels achieved before the Covid-19 pandemic.

Fortuna Advisors notes, however, that companies ‘hoarded cash’ in ‘the largest flight to liquidity since the Great Recession of 2008’ when the pandemic started. The report also points out that other types of capital deployment plunged in 2020, including cash acquisitions, which fell 21 percent on 2019 figures.