Stock Buyback Drop Indicating Rising Trade War Concerns

Decline in buyback announcements comes after strong start to year

Michael Schoonover, COO & Portfolio Manager
Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC 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.

Buyback authorizations can reveal a lot about a company, including if it believes the market is undervaluing its stock and how it views future prospects for the company and/or the economy. We submitted a byline to U.S. News & World Report’s Smarter Investor arguing that the sudden slowdown in buybacks starting in May was a result of rising trade war concerns.

2018 was a record-setting year for buybacks, and the kickoff to 2019 showed signs of continuing, if not breaking, that trend. But the strong rebound in equities in Q1 was followed by a large uptick in volatility in May, a repercussion of trade war concerns. This has not only impacted the stock market, but also the volume of buybacks companies are willing to authorize.

Prior to May, this year was off to a stronger start than 2018 for buyback announcements. As of the end of April, U.S. companies had authorized $367 billion in share repurchases, a 14% increase compared to 2018. However, as of the end of June, this year’s buybacks were more than 19% lower than 2018, with just $535 billion in announced buybacks compared to $659 billion at the same time in 2018.

In May and June alone, buybacks were down 76% and 24%, respectively, compared to the same time during the previous year.

This decline in authorizations is important for two reason. First, buyback announcements can provide a forward-looking basis for how companies feel about the environment going forward. The significant decline could reflect companies’, specifically certain industries, lack of confidence in their future outlook. Second, the timing of this decline suggests that perhaps trade war concerns, and seeing them as more imminent or real, could be the basis for this change of outlook.

Last year, which cumulatively had more than $1 trillion in buyback announcements, the trade war put a noticeable damper on an otherwise strong, and growing, buyback trend. Initial rhetoric on the trade war ramped up in March and April 2018. During that time, buyback announcements declined significantly, dropping from $221 billion in January and February 2018 to just $100 billion in March and April. March 2018 saw only $20 billion in announcements, compared to the 2018 monthly average of $90 billion.

This year, a similar trend has emerged aligning escalating trade war commentary with a significant reduction in corporate buyback announcements.

Tech is one industry caught in the cross hairs of this round of trade war rhetoric, especially after talks fell apart. In 2018, the technology sector announced $369 billion in buybacks, which accounted for 34% of all announcements that year. Comparatively, in May and June 2019, tech companies announced less than $5 billion in buybacks.

On May 5th, President Donald Trump threatened to raise tariffs on China, which led to an actual increase on May 10. Huawei was then placed on the U.S. Entity List, banning the company’s products from purchase by U.S. companies. This escalation had the potential to significantly impact tech companies.

It’s not surprising for buyback announcements to drop off during periods of turmoil. But not all companies have abandoned buybacks. Those still announcing can be a signal of potential strength if the volatility continues.

For example, Alphabet Inc. (GOOGL), has been the largest tech buyback announcement since the May turmoil, with the company authorizing a $25 billion buyback on July 25. Between July 25 and August 9, GOOGL is up +5.35% versus the S&P 500 TR Index at -2.47%.

Consider June 2019. There were only four companies that announced a buyback: Ambarella Inc (AMBA), Seachange International Inc (SEAC), Synopsys Inc (SNPS), and The Meet Group Inc (MEET). Three out of the four stocks have outperformed the S&P 500 TR Index starting on June 30. Buying all four would have resulted in significant outperformance versus the S&P 500.

On a macro level, the drop off in buybacks, especially from tech companies, indicates that U.S. companies are far more concerned about the impact of the trade war than they were last year. However, as has been the case historically, seeking out the companies still announcing buybacks in a more difficult environment creates an opportunity for investors.