Fewer Stock Buybacks Now Are Debt-Funded | Chief Investment Officer

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.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

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.

Tags: JPMorgan Chase & Co., S&P 500, stock buybacks

As the amount of annual risk transfers continues to increase, a large number of corporate pension plans are looking to fully divest their defined benefit liabilities within five years.

The methods of choice for these companies are group annuity contracts and structured buyouts, or lump-sum payouts, both of which help prop up their funded statuses, according to MetLife’s 2019 Pension Risk Transfer Poll. The deals allow the businesses to pass off their retirement assets to an insurance company.

Out of 102 defined benefit pension plan sponsors surveyed, more than one-third want to fully divest their liabilities within five years (10% within two, 24% in two to five). In the latter bracket, 17% have more than $1 billion in assets.

Wayne Daniel, MetLife’s senior vice president and head of US pensions, told CIO that “recent economic and regulatory changes” are causing more companies to take “concrete steps” to de-risk their pension plans.

For more stories like this, sign up for the CIO Alert newsletter. 

He points to higher fees that the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures private sector pension benefits, charges DB sponsors. These are the “primary catalyst for plan sponsors to initiate a pension risk transfer to an insurance company (55%).” The PBGC’s motivators include premium increases (52%) and a change in the premium methodology, which now adheres to a risk-based formula (18%).

Other risk transfer drivers are interest rate changes (42%) and funded status reaching a predetermined level (29%).

Almost half of the corporate DB plan sponsors, however, want to take their time with total liability divestment and wait more than five years. Additionally, roughly one-quarter of these plans don’t want to eliminate their liabilities at all.

“De-risking can and should be viewed as a spectrum of choices—rather than a “once and done” transaction—with a basic non-guaranteed liability driven investing (LDI) (or asset liability management) strategy at one end of the spectrum to a full pension buy-out at the other end,” Daniel said.

He added that when thinking about a potential de-risking strategy, plan sponsors and CIOs should “determine what they are trying to accomplish with their plan, where the plan fits in with other qualified plans they offer, and how they can achieve the firm’s business and talent retention goals, in light of the macroeconomic environment, in a way that addresses the organization’s strategic focus and meets the needs of the plan participants.”

Tags: LDI, MetLife, Pension, Pension Risk Transfer, Wayne Daniel