In the first half of 2019, global companies announced plans to pay out more cash in buybacks and dividends than they did all year last. While this is a positive move for shareholders, some say it could be a sign that these companies are overvalued.
Companies plan to pour even more cash into buybacks and dividends in 2022. This is according to the research from Credit Suisse.
Companies are intending to spend even more on share buybacks and dividends in 2022, despite a planned 1% excise tax on repurchases, thanks to a slew of high results.
According to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, a subsidiary of S&P Global Inc., many firms have recovered from the damage inflicted by the coronavirus epidemic and are in a time of robust growth, providing them sufficient headroom to reward their shareholders.
“Right present, the majority of the corporations have large cash-flow situations,” he added. “There’s enough money to accomplish virtually anything,” says the narrator.
According to data source S&P Global Market Intelligence, the S&P 500 had $3.78 trillion in cash and cash equivalents at the end of the third quarter, up from $3.41 trillion a year ago and $2.19 trillion from the same time last year.
Share repurchases at S&P 500 corporations are likely to have reached an all-time high of $850 billion this year, up 63.6 percent from last year, when several businesses temporarily suspended their plans, and 16.6 percent from 2019.
Buybacks surpassed $234.6 billion in the third quarter of this year, breaking the previous high of $223 billion established in the fourth quarter of 2018.
According to the statistics, companies paid out cash dividends average $15.36 per share in the third quarter, up from $13.97 in the prior-year period.
To return cash to shareholders, companies repurchase shares and pay dividends. They want to counteract some of the dilution that happens when corporations issue shares to their own workers via these repurchases. When stock markets are as volatile as they have been this year, the timing of these choices is critical, since buying back shares may be costly.
However, regulators and politicians are becoming more skeptical of buybacks, with some opponents claiming that they enable CEOs paid in shares or options to increase their remuneration at the cost of employees’ salaries. The Securities and Exchange Commission suggested increased buyback disclosure rules in mid-December, requiring corporations to disclose the reason for buybacks as well as the criteria used to calculate the quantity of shares to be repurchased.
Since 2010, companies in the S&P 500 have spent more than $5.3 trillion on repurchasing their own stock. The Wall Street Journal outlines how stock buybacks work and why there’s controversy about whether they’re beneficial to the economy.
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The House of Representatives enacted a $2 trillion spending bill last month that included a 1% tax on the amount firms spend to buy back stock. However, the bill faces resistance in the Senate, including from Sen. Joe Manchin (D., W.Va.), a vital vote.
Ciena Corp., a networking-equipment company, said earlier this month that it expects $250 million in expedited stock repurchases. A corporation buys most of the shares up front under a negotiated deal with an investment bank in this kind of repurchase.
“We believed that was the proper thing to do,” Chief Financial Officer James Moylan said, “to make up for the fact that we were short the past couple of years.”
According to Mr. Moylan, the Hanover, Md.-based firm fell short by approximately $200 million on a plan it unveiled in December 2018 to buy back about $450 million in stock over the following three years. This was partly due to a slowdown in client orders during the early stages of the epidemic, as well as delays in the company’s activation of new services and equipment.
Companies may deploy their money in a variety of ways, and executives typically evaluate shareholder returns against other goals like mergers and acquisitions or product development. During the first three quarters of the year, the S&P 500 increased capital expenditures to $528.64 billion, up 11% from the previous year and 1.2 percent from the previous year.
Stanley Black & Decker’s president and chief financial officer, Donald Allan Jr.
Stanley Black & Decker photo
Stanley Black & Decker Inc., a toolmaker, said earlier this month that it planned to buy back $4 billion in shares in 2022. According to President and Finance Chief Donald Allan Jr., a portion of the cash would come from the proposed $3.2 billion sale of its security business assets to Swedish security-services company Securitas AB.
The company is situated in New Britain, Connecticut. This year, Stanley did not make any repurchases, instead focusing on acquisitions, according to Mr. Allan. In general, Stanley aims to spend approximately the same amount on mergers and acquisitions as it does on shareholder awards. Next year, Stanley plans to buy back shares once again.
Mr. Allan said, “We really feel our stock is undervalued.”
Over the last year, the company’s stock has dropped 1.8 percent to $177.94 per share as of Monday. Mr. Allan believes they should trade at 13 or 14 times Ebitda, or earnings before interest, taxes, depreciation, and amortization, rather than the current 11 times.
During the fiscal year ending in September, Johnson Controls International PLC aims to buyback nearly $1.4 billion in shares, up from $1.3 billion previously. The building-technology company said this month that its quarterly cash dividend will be increased by 26% to $0.34 per share.
According to CFO Olivier Leonetti, Johnson Controls decides its dividend based on an annual goal of 40 percent to 45 percent of adjusted profits per share, with the remainder going to stock buybacks.
He said, “We expect we will be able to invest in the company and spend all of our free cash flow in the form of dividends and stock buybacks.”
Wetteny Joseph, Zoetis’ chief financial officer.
Zoetis (photo credit: Zoetis)
Companies’ capital-allocation plans for 2022 are unlikely to alter, executives said, even if a new version such as Omicron emerged or if Congress passed legislation raising corporate taxes.
Mr. Allan speculated on what may lead the business to retreat, saying, “It would have to be a significant recession because of some economic shock that hits, where we start seeing our sales going backward 30 to 40 percent.” “I don’t think that’s a realistic option.”
Nonetheless, officials say they’re keeping a careful eye on anything that may influence spending choices.
Wetteny Joseph, CFO of Zoetis Inc., an animal-health concern, stated, “We’re paying attention to tax policy changes both in the United States and internationally.”
He said the business intends to buy back $880 million in shares left over from an existing program, as well as launch a new $3.5 billion program that was just approved.
Mark Maurer can be reached at [email protected]
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“Companies Plan to Pour Even More Cash Into Buybacks, Dividends in 2022” is a recent article that states that companies plan to pour even more cash into buybacks and dividends. This trend will continue until 2022. Reference: stock buyback rules.
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