Earlier this year, the pandemic led many companies across sectors to withdraw their full-year guidance. While some have yet to reinstate a forecast, an uptick in the resumption of share repurchases could give investors a positive indication of how confident companies feel about the recovery.
This week, a number of companies said that they would begin buying back their own stock again, including Dollar Tree (ticker: DLTR) and Lululemon Athletica (LULU).
On Thursday, Jefferies Financial Group (JEF) boosted its repurchase authorization to $250 million, and Eagle Pharmaceuticals (EGRX) announced a $25 million accelerated repurchase plan as part of existing $160 million program. Also on Thursday, the board of Accenture (ACN) approved $5 billion in additional share repurchases, bringing its authorization to $6.3 billion.
Stock buybacks are popular way for companies to return cash to shareholders because they reduce the number of shares outstanding. That means that earnings are divided among fewer shares, leading to higher earnings per share. Fewer shares can also improve other metrics, like return on equity. (By contrast, a big increase in the number of shares may spark fears of dilution.) Buybacks, unlike many dividends, aren’t immediately taxable either.
Of course, dividends have also been coming back in recent months, a reversal from earlier this year when even dividend aristocrats were falling victim to Covid-19 cash crunches. Darden Restaurants (DRI) said on Thursday that it was resuming its payout as part of a better-than-expected earnings report.
Like reinstating a dividend, resuming a buyback plan projects confidence on a company’s part that it is not short on capital. And while dividends are paid out at a specific rate, usually quarterly, companies typically have more flexibility in choosing when to buy back their own shares, and for how much.
Share repurchases provide the added benefit of suggesting that a company believes its shares are undervalued. (This is why a company may repurchase shares despite still having debt—because it believes that the return on its stock will be higher than the interest it owes on its obligations.)
That may be an easier case to make for companies like Dollar Tree, Eagle Pharmaceuticals, and Jefferies, which are down year to date—or for Accenture, which is tracking just ahead of the broader market—than for Lululemon, which has soared more than 36% in 2020.
Just like investors, companies can overpay for their own shares. That might be a concern for investors given how sharply markets have rallied since their spring lows, although recent volatility (and the fact that much of the S&P 500’s summer rally are attributable to a relatively small number of stocks) may be mitigating factors.
Write to Teresa Rivas at teresa.rivas@barrons.com
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September 24, 2020 at 10:30PM
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Companies Are Starting to Buy Back Stock Again - Barron's
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