US non-financial corporate share buybacks will move toward historical levels in 2021 following a significant pullback in 2020, as earnings and cash flow recover from pandemic-driven lows, says Fitch Ratings. Most stock buybacks will be credit-neutral but others could constrain corporate credit quality, causing Negative Outlook revisions and downgrades.
We expect companies to direct a significant portion of FCF to share repurchases while some will be debt-financed or funded with excess cash, as many companies issued debt and/or equity to boost liquidity during the pandemic.
Share repurchases represented more than two-thirds of annual FCF for most years for Fitch’s publicly rated U.S. corporates during 2007–2019, except during periods of economic stress. In aggregate, companies spent approximately 2% of revenues on share repurchases each year but that amount declined to 0.7% of revenues in the first nine months of 2020 as companies focused on preserving liquidity.
US corporates resumed stock buybacks fairly quickly in 2009 following the Great Recession, and a similar pattern is likely to emerge in 2021 as the coronavirus vaccine rollout supports economic recovery.
The technology sector has maintained a particularly aggressive stance on share repurchases during the pandemic, due in part to strong cash flow and relatively steady performance. For the LTM ended Sept. 30, 2020, buybacks totalled 5.3% of revenues for Fitch’s technology universe, compared with 1.1% for the broader Fitch US corporates portfolio.
Fitch took a number of negative rating actions in 2020 due to aggressive share repurchases. Most of these actions involved issuers in the ‘BBB’ and ‘A’ rating categories, reflecting the willingness of some investment-grade companies to engage in debt-financed share repurchases due to the low interest rate environment and the small differential in borrowing costs at a lower rating level.
