Companies don't often time stock repurchases well for their own accounts. But their renewed penchant for retiring shares could not come at a better juncture for ailing investment bankers.
Initial public offerings and other new equity-raising deals have slumped of late. Buybacks, however, are all the rage. So far, U.S. companies have authorized $350-billion (U.S.) in share repurchases. That may breach $500-billion by the end of the year, according to Merrill Lynch estimates. Some 40 per cent of those currently planned have been announced since July alone, including last week's $2.5-billion plan by Lockheed Martin and another for $2-billion by Raytheon Co.
This resurgent interest from Corporate America derives from the ability to borrow cheaply, and from their growing stockpiles of cash. Excluding financial firms, as much as $1.4-trillion of it is sloshing around – a 40-year high – with a dearth of confidence from chief executives to pursue what limited opportunities may be available in which to reinvest.
What may turn out bad for shareholders is nevertheless good for Wall Street. IPOs raised just $3.5-billion in the first 10 weeks of the third quarter, according to Thomson Reuters data, just 25 per cent of the amount tapped in the three months to June. More than four in 10 slated debuts were pulled, the highest rate of withdrawals since the depths of the financial crisis. Barclays reckons the latest period's fees from underwriting stock issues may have plummeted as much as 60 per cent.
Granted, investment bankers can't squeeze nearly as much juice from a company buying shares as one selling them. Straightforward repurchases pay a similar rate as a regular stock trade; committing some capital will earn banks a bit more. On top of that, the bankers working in equity capital markets must share the wealth with their trading-desk colleagues. But in this environment, even the relatively paltry fees from buybacks will be welcome.