CEOs Warned on Buybacks as Possible Tax Cuts Loom

Once a popular home for excess capital, high stock prices are making stock repurchases a less attractive option.

Warnings are being sounded by analysts and investors on the suitability of share buybacks, just as Washington stands poised to deliver tax reform that could give companies piles more cash to invest.

Years of ultra-low interest rates have made purchasing a company’s own stock an attractive option for managers mindful of paltry returns on offers from cash and bonds. And tax cuts proposed by Donald Trump, including moves to encourage companies to repatriate foreign income, are expected to trigger another wave of spending.

The problem is that share prices already are trading at historically high levels, leaving companies that binge on their own stock exposed, should there be a market correction.

In the past week, at least two investment banks have indicated that buyback volumes are falling because directors and senior executives are becoming wary.

“Experience shows that firms repurchasing shares at extremely high valuations regret those actions when the stock price inevitably de-rates,” Goldman Sachs analysts said in a client note. They also predicted that an “infatuation” with buybacks has ended.

“We’ve asked CEOs to review their long-term capital plans with their board, so there’s accountability on the board level.”

Companies have authorized $146 billion in share buybacks this year, the analysts said, marking the lowest year-to-date level since 2012.

Bank of America Merrill Lynch, meanwhile, warned that a declining volume of buybacks, which it said peaked in 2015, was a bad omen for the stock market.

According to its analysts, companies spent around 80% of the capital gleaned from a tax repatriation holiday in 2004 on share repurchases. But they expect that proportion to be lower, should Trump successfully execute on his tax plans.

“This time, if tax repatriation is carried out, we are likely to see maybe only about half of the cash go for buybacks, due to much higher valuations and also due to a much higher leverage on balance sheets,” BAML said.

Pressure also is coming from fund managers concerned that some CEOs aren’t investing enough in growth drivers, such as R&D, acquisitions, employees and equipment.

“There’s nothing wrong with buybacks in a comprehensive plan,” Blackrock CEO Larry Fink reportedly told the Morningstar Investment Conference on Friday. “But what we’ve asked companies, is to identify their long-term strategy and how they would use the money for investments. We’ve asked CEOs to review their long-term capital plans with their board, so there’s accountability on the board level.”


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