Bye Bye Buybacks

One would hope that a company's management team and board of directors would be a good judge of their stock's value. But trends in buyback activity tend to show the opposite: Companies increase buybacks when the stock price is high, and decrease buybacks when the stock is depressed.

That has more to do with correlation than causation. Stocks tend to rise when times are good, profits are high, and there's lots of excess cash flow to direct to buybacks—and vice versa. But it's a frustrating reality for shareholders nonetheless.

That tendency is playing out among large U.S. banks right now. According to Barclays analyst Jason Goldberg, the six largest banks—Bank of America, Citigroup, Goldman Sachs Group, JPMorgan Chase, Morgan Stanley, and Wells Fargo—repurchased just $5.1 billion of stock in the second quarter. That's down from $17.5 billion in the first quarter of 2022 and an all-time high of $28 billion in the third quarter of last year.

And it's despite each of stock losing between 15% and 35% of its value from the middle of the third quarter to the middle of last quarter. All six have trailed behind the S&P 500 over that period.

Andrew Bary wrote today:

The buyback drought is frustrating to investors who would like to see banks take advantage of their depressed stock prices to gobble up shares. The big banks offer another example of companies buying back a lot of stock when their share prices were high and then having to scale back repurchases when their stocks got hit.

Bank stocks have dropped on recession concerns and trade cheaply relative to earnings and book value. Bank of America, Wells Fargo, and Goldman all trade at small premiums to book value, while Citi, at around $52, fetches about 55% of book. The six banks trade in a range of seven to 11 times projected 2022 earnings and most have dividend yields of 3% or more.

The reduced bank buybacks reflect several factors, including higher capital requirements from federal regulators and tough assessments for some in recent regulatory stress tests. Higher interest rates are another factor, because they have cut the value of bank bond portfolios and reduced capital. The growth in loan demand also requires capital.

Buybacks are good for investors because they reduce the number of shares outstanding, giving each remaining unit of stock a larger stake in the company. That increases earnings per share and also reduces the company's total dividend commitment.

With banks getting more conservative and facing strict capital requirements, investors will have to wait for a buyback boost. Capital saved this year can be turned toward repurchases next year. But will bank stocks still be available at today's discounts?

Read the rest of Andrew's reporting here