World News

Coronavirus to bring deep U.S. capital return letdowns

By Sinéad Carew

(Reuters) – U.S. investors will likely see sharp declines in capital returns this year as companies look to conserve cash during the coronavirus crisis, according to S&P Dow Jones Indices which is predicting a significant first-quarter decline in buybacks and a dismal second quarter.

And while companies are more hesitant to cut or suspend dividends, some have already done so, potentially leading to S&P 500’s first annual drop in dividends since 2009, according to senior analyst Howard Silverblatt.

Along with the direct support when buybacks are made, they also swell earnings per share as they result in lower share counts. But since they are easier to suspend than dividends, buybacks are the first place companies reduce capital returns.

Silverblatt, at S&P Dow Jones Indices, says buybacks may be depressed for the full year as “companies are going to be concerned about their liquidity” for a while even when things start looking up.

“When we believe the virus has hit the bottom then you start the long way up for the economy which is going to be relatively slow to recover. It’s going to take a quarter or more for companies to put their toes back in the water,” Silverblatt said.

Companies that have already announced a pause in buybacks include eight of the biggest U.S. banks. On Tuesday, companies including Intel Corp <INTC.O> and Chevron Corp <CVX.N> made suspension announcements.

And with consumers around the world staying home to help slow the virus, the first dents to dividends appeared in industries related to travel.

Delta Air Lines Inc <DAL.N> and Boeing Co <BA.N> announced a dividend suspension. General Motors Co <GM.N> said it was evaluating its dividend, while some oil companies have reduced theirs.

At the start of the year, Silverblatt said the 2020 dividend payment was estimated to set a new record and increase in the low 9% range. His working estimate is now for an increase of 3%-4%.

But for the first time since 2009, when dividends fell more than 21%, Silverblatt said: “It is very feasible that we will see a decline.”

U.S. companies spent $181.6 billion on buying their own shares in the fourth quarter, above the third quarter of 2019 but 18.6% lower than the record reached in the fourth quarter of 2018, due to a spending spree resulting from massive tax cuts.

Full year 2019 buybacks were $728.7 billion, down from the $806.4 billion record set in 2018.

Buyback spending in the fourth quarter was more concentrated however, with the top 20 companies accounting for 55% of the total, for the highest level of concentration since the first quarter of 2010 when the top 20 companies represented 59.8% of buybacks.

Almost 21% of companies reduced their share count by at least 4% in the fourth quarter.

Apple Inc <AAPL.O> led spending in the quarter with $22.1 billion in buybacks while three of the top five spenders on their own shares were banks – Bank of America <BAC.N>, Wells Fargo <WFC.N>, JPMorgan <JPM.N>. The other big spender in the group was Bristol-Myers Squibb <BMY.N>.

(Reporting by Sinéad Carew; editing by Nick Macfie and Lisa Shumaker)