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Companies have been eager to please Wall Street in what has so far been a lackluster earnings season by repurchasing shares and boosting dividends for shareholders.
What’s happening: Buyback announcements reached a new record of $1.22 trillion last year, and they’re already on track to beat that high in 2023.
Companies have announced about $175 billion worth of planned stock buybacks so far this year. That’s more than double last year’s pace, according to data from EPFR TrimTabs.
This year will likely be the first with at least $1 trillion in completed S&P 500 company buybacks, said Howard Silverblatt at S&P Dow Jones Indices.
Chevron (CVX) said last month that it would triple its spending on share buybacks to $75 billion. Exxon (XOM) said it would issue another $35 billion in buybacks and Facebook-parent Meta Platforms saw its stock surge by 20% after the company announced plans to boost its share repurchase plan by $40 billion.
Why it matters: Buybacks, say critics, are a tool that allow ultra-wealthy executives to manipulate markets while funneling corporate profits into their own pockets instead of the economy. Preventing companies from repurchasing their own shares, they argue, would free corporate cash to invest in growth and raise wages instead.
In his State of the Union address, US President Joe Biden even called for a quadrupling of the tax on buybacks — up from the current 1% implemented by the Inflation Reduction Act.
But corporations counter that they use repurchases as a way to efficiently distribute excess capital. Limiting buybacks, say supporters, could reduce the liquidity in stock markets and hurt share prices. Executives typically use buybacks to reduce the number of shares available for purchase, thus increasing demand for their stock and earnings per share.
The bottom line: Even if Biden’s tax increase were to pass, it wouldn’t address the root problem with buybacks, said William Lazonick, president of The Academic Industry Research Network.
“The pressure on the executives to do buybacks is coming from hedge fund activists,” said Lazonick, a longtime critic of buybacks and a professor of economics at the University of Massachusetts Lowell.
“The problem is Carl Icahn, Daniel Loeb, Paul Singer,” he said. “These people have nothing to do with these companies. They hold shares and make a ton of money by exerting pressure on these companies.”
Russia, Adidas and GM: What investors are watching
▸ Russia is slashing oil production by about 5% as Western sanctions bite.
Russia will cut crude oil production by half a million barrels per day starting in March, a little over two months after the world’s major economies imposed a price cap on the country’s seaborne exports.
“We will not sell oil to those who directly or indirectly adhere to the principles of the price ceiling,” Russian Deputy Prime Minister Alexander Novak said in a statement. “In relation to this, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will contribute to the restoration of market relations.”
Futures prices for Brent crude, the global benchmark, jumped 2.7% on Friday to $86 a barrel as traders anticipated a tightening in global supply.
In June last year, the European Union agreed to phase out all seaborne imports of Russian crude oil within the following six months as part of unprecedented Western sanctions aimed at reducing Moscow’s ability to fund its war in Ukraine.
In a move aimed at further tightening the screws, G7 countries and the European Union agreed in December to cap the price at which Western brokers, insurers and shippers can trade Russia’s seaborne oil for markets elsewhere at $60 a barrel.
A potential drop in global oil supply could come at a tricky time. China’s swift reopening of its economy has pushed up estimates for global oil demand.
▸ Adidas’ breakup with Ye, formerly known as Kanye West, is proving to be a costly one.
The company warned Thursday that it expected to lose $1.3 billion (1.2 billion euros) in revenue this year because it’s unable to sell the designer’s Yeezy clothing and shoes. Adidas ended its nine-year partnership with the rapper last October because of his antisemitic remarks.
Adidas said its financial guidance for 2023 “accounts for the significant adverse impact from not selling the existing stock.” If the company can’t “repurpose” any of the remaining Ye clothing, Adidas said that could cost the company $534 million (500 million euros) in operating profit this year.
Adidas said it also expects “one-off costs” of $213 million (200 million euros) because of a “strategic review” the company is currently undergoing.
Not mentioned were potential issues with its Beyoncé-led Ivy Park brand. The Wall Street Journal reported this week that sales of the once-trendy streetwear brand fell 50% last year to to about $40 million — way below its internal projections of $250 million. The partnership is “strong and successful,” Adidas told the journal in response.
Shares of Adidas (ADDDF) tanked nearly 10% in Frankfurt trading. Adidas (ADDDF)’ stock has dropped 45% over the past year.
▸ GM (GM) just inked an exclusive deal for the hottest product in automaking: Semiconductors.
General Motors has signed an agreement with tech manufacturer GlobalFoundries to make semiconductors for GM’s various electronics suppliers.
GM’s direct relationship with GlobalFoundries will give the automaker a secure supply of chips and will help control costs, said CEO Thomas Caulfield. GM will not have to pay mark-ups to its parts suppliers for semiconducter manufacturing.
The agreement is also part of an overall plan by GM to reduce the number of different chips needed to build GM vehicles.
“The supply agreement with GlobalFoundries will help establish a strong, resilient supply of critical technology in the U.S. that will help GM meet this demand, while delivering new technology and features to our customers,” Doug Parks, GM executive vice president in charge of purchasing and supply chain, said in an announcement.
The automaker’s stock has soared by about 23% so far this year.
The strong dollar is hurting multinationals
The rip-roaring dollar cut deeply into the earnings of multinational companies selling their wares overseas last quarter.
Last week Caterpillar (CAT) was among many US firms nothing “unfavorable currency impacts” affected its sales in Q4. Apple (AAPL), which reported its first quarterly revenue decline in four years, also blamed the strong dollar and bad exchange rates for its rough end to the year. IBM (IBM) added to the chorus, saying that the dollar’s strength hurt the company’s bottom line.
“The last time I looked, the rate, the breadth, the magnitude of the change is the most we’ve seen in multiple decades,” James Kavanaugh, IBM’s chief financial officer, said about the dollar on the company’s earnings call. “We got hit with that.”
McDonald’s (MCD) and 3M (MMM) also said in earnings reports that they were worried that the strong dollar would affect future sales. 3M (MMM) said that foreign-exchange fluctuations are expected to reduce sales by 1% to 2% in 2023.
More bad news: The greenback is once again gaining steam as the market appears to be pricing in the probability of high interest rates for longer. That’s bad news for the US companies that are just starting to feel some respite from last year’s two-decade highs in the US dollar.