S&P 500 Share Buybacks to Drop 70% This Year, JPMorgan Predicts

Since major U.S. banks announced a suspension in share buybacks, investors have been wondering how much corporate demand will weaken as a key support to the market. JPMorgan Chase & Co. strategists estimate it will be drastic.

As the spread of the coronavirus took its toll on earnings, American companies are likely to cut back on repurchases while boosting stock sales to shore up their cash hoarding, strategists led by Dubravko Lakos-Bujas suggest. As a result, net buybacks could decline 70% to $200 billion this year, their estimates show.

Just as stocks tumbled into the worst sell-off in more than a decade, one major source of demand is at risk of drying up. That’s bad news for investors who are used to companies stepping in to rescue the market in times of crisis.

Political opposition to buybacks is building, too, with some Democrats in Congress demanding that any bailouts come with a no-buyback provision. Democratic presidential candidate Joe Biden went one better on Friday, urging chief executives to not buy back any stock this year.

While the practice of cash use has been criticized for enriching the wealthy, in some circles, buybacks are considered as a main force behind the 11-year bull market that just ended.

“This decline implies that the earnings boost will be much lower (~1% vs. ~2.5% in 2019) and stock price support from ongoing de-equitation will be much more limited,” Lakos-Bujas wrote in a note to clients.

For some companies under pressure to conserve cash, share repurchases are a luxury they can no longer afford. According to JPMorgan’s analysis, energy producers are likely to stop buybacks and instead sell $20 billion of stocks this year, as the industry takes a hit from plunging oil prices. ConocoPhillips this week cut share buybacks by two-thirds and trimmed capital spending.

Corporate America’s cash is draining at the fastest rate in decades, with balances at S&P 500 companies excluding financial firms having fallen 11% in the past 12 months, according to data compiled by Goldman Sachs Group Inc. That doesn’t mean companies are running out of cash. At 15% of total assets, the level is higher than the historic average of 7%, Goldman data showed. But it could mean companies prefer to use their money elsewhere.

Companies will probably slash total buybacks by half to $400 billion in 2020 while boosting share issuance by 75% to $200 billion, according to JPMorgan. That, along with a reduction in capital spending, should allow free cash flows to increase by $500 billion, the firm’s estimates showed.