Fewer Stock Buybacks Now Are Debt-Funded

As rates rise, company share repurchases using leverage dipped to 14% of total in 2018, half the 2017 level, JPMorgan says.

Companies aren’t going into hock as much to purchase their own stock, because they have so much cash that they don’t need to, new research finds.

At the end of last year, the proportion of debt-funded buybacks dropped to 14%, the lowest point since 2009, according to JPMorgan Chase. That marks a big change, as debt-driven repurchases peaked at 34% of the total in 2017. The debt strategy was propelled by low interest rates that prevailed for many years.

Since 2017, though, rates have begun to rise. Thus companies have turned increasingly to their cash stashes, which are extraordinarily fat. Nonfinancial S&P 500 companies are sitting on $1.6 trillion in cash, not counting $1 trillion held overseas, JPMorgan reported. Plus, the bank estimated that cash flows from operations will hit $2 trillion a year in 2019.

Respondents to a JPMorgan survey said that shying away from debt to fund buybacks was wise, given widespread expectations for a recession in the near future.

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Buybacks continue to be popular in corporate America. Various estimates for 2018 place the total at around $1 trillion (JPMorgan puts the number at $800 billion), making it a record year by any accounting.

Buybacks didn’t flag during the fourth quarter, when the stock market took another dive, preliminary estimates indicate. That’s likely because buybacks tend to bolster a company’s share price.

JPMorgan itself has been an ardent buyer of its own stock, in addition to robustly increasing its dividend. The company is in the midst of an almost $21 billion buyback program that began last summer and will wind up in June.

Since last September, the bank’s shares have fallen 12%, part of a rout that afflicted all financial stocks. But the price may well have declined more if not for the repurchases.

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