Industrials and Technology Buybacks Diverge in Response to Trade War Rhetoric

Michael Schoonover, COO & Portfolio Manager
Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC and Rational Advisors, Inc. and Portfolio Manager of a share buyback strategy fund at Catalyst Funds. He began his association with Catalyst in 2011 as a research consultant supporting the implementation and back testing of quantitative strategies. In March 2013, he became a senior analyst at Catalyst to provide investment research for several mutual funds. From 2005-2011, he served in various technical and scientific management roles with the Perrigo Company. Mr. Schoonover has an MBA with high distinction from the University of Michigan Ross School of Business and a BS from the University of Michigan.

Tariffs and trade war rhetoric are starting to define 2018. Information technology and industrials companies have felt the pain from March onwards. Since buyback announcements typically signal confidence and financial strength, we examined the buyback announcement activity of companies in these sectors. Industrials companies, which were among the earliest impacted and have also faced the headwind of a strengthening dollar, significantly reduced their buyback announcement activity. On the other hand, information technology companies continue to announce buybacks at record levels.

As Trump began to reveal plans to impose tariffs on steel and aluminum imports in early March, equities tumbled and industrials companies scrambled to figure out how it would affect them. By June, after conditions already worsened with China, the E.U. and other NAFTA nations, industrials companies continued to suffer, driven by tariffs, retaliatory tariffs and a strengthening dollar.

Between July 2017 and February 2018, industrials companies announced $7.9 billion in buybacks per month, on average. This ranged from $1.5 billion to $32.0 billion in announcements. In March, when industrials were first impacted, companies only announced $0.26 billion in buybacks. Announcements rebounded to higher but below-average levels in April and May, at $6.8 billion and $6.1 billion, respectively, but then significantly dropped back down to $0.33 billion as trade tensions escalated. Overall, from March until June, the buyback announcement pace for industrial companies dropped by almost 60%.

Industrials Buyback Announcements Drop Significantly on Trade Tensions

Source: Bloomberg LP and Catalyst Capital Advisors LLC

In April, it started to become clear that chipmakers may lose the most in a trade war with China. Unlike industrials companies, the information technology sector responded. In April and May, technology companies announced $28.5 billion and $132.2 billion in buybacks. Semiconductor companies accounted for $12.4 billion and $20.9 billion of these announcements. However, in June, buybacks did drop as tensions escalated. Technology companies announced $5.5 billion in buybacks, with semiconductor companies not announcing any buybacks. Technology companies increased their buyback announcement pace from $14.9 billion per month from July 2017 to March 2018 to $55.4 billion per month from April 2018 to June 2018 ($2.7 billion to $11.1 billion for semiconductor companies).

Technology Companies Ramped Up Buyback Announcements Despite Trade Tensions

Source: Bloomberg LP and Catalyst Capital Advisors LLC

Some semiconductor companies even managed to announce well-timed buybacks on the negative headlines. For example, QUALCOMM Inc. (QCOM) and Micron Technology Inc. (MU) each announced a $10 billion buyback in May, QCOM on 5/9/2018 and MU on 5/21/2018. QCOM continues to perform well while MU outperformed but has since trailed on increased trade tensions.

QCOM announced a $10B buyback after an April selloff on 5/9/2018

Source: Bloomberg LP

QCOM timed the announcement well, outperforming the S&P 500 TR Index since

Source: Bloomberg LP