PayPal Tops Buyback Craze, Giving Shares a Lift
Investors are debating whether the rally in US stocks will remain. However, corporate America is taking no chances and is returning to its favourite old method of enriching the market – buying back billions of dollars of its stock. At least $21 billion in new share buyback programs were announced this week alone. PayPal is leading the charge, allowing a new $15 billion buyback plan. The firm works with Elliott Investment Management to turn its troubled stocks around.
Airbnb, Moderna, and Marriott International also introduced new programs in the past three days. It follows several other programs, including Chevron, Charles Schwab, and Exxon Mobil, which did so last week.
Total repurchase announcements for the second quarter earnings season have already surpassed 2018 highs when companies announced plans to buy back nearly $400 billion of their stock. The announcements may not be over yet, with more than 50 members of the S&P 500 still set to report earnings this week. The fact is, the strategy works. At least for the biggest programs.
PayPal and Moderna saw big stock price jumps following their acquisition announcements. Wednesday added 9.3% and 16%, respectively. Shares of Charles Schwab, which announced a $15 billion buyback plan last week, increased by 10%. According to strategists, the purchase should provide another huge headwind. Announced purchases hit their highest in more than a decade.
PayPal and Stocks
For Wall Street strategists trained in buy-low, sell-high logic, buying this year probably makes perfect sense. Companies like Moderna and PayPal have fallen more than 25% amid the pandemic’s winner-loser cycle. By collecting the shares at a lower cost, the company can theoretically resell them later in a secondary offering, ideally at a higher price, to help raise additional capital.
Smaller companies or less onerous programs don’t always boost stocks significantly. The S&P 500 stock index, which tracks 100 stocks and has the highest purchase ratio, has underperformed the broader market since the start of May, falling about 3% against the nearly flat S&P 500.
One notable exception this season among companies known for strong buyout support is banks. Citigroup and JPMorgan Chase & Co said they would suspend their share buyback programs. To help match huge capital requirements following the Fed’s stress test.
According to strategists, here and now, investors like it when their favourite companies buy shares. Speculators also like this because there is a large buyer you know will be active in the market. It is reasonable to assume that buyout announcements were the main driver of the recent rally.
London Shares
London stocks opened flat on Thursday. Investors kept an eye on the Bank of England’s latest policy statement. The FTSE 100 opened unchanged at 7,445. According to an analyst at CMC Markets, European markets saw a more active tone yesterday with news that US House Speaker Pelosi left Taiwan without incident. Better-than-expected US economic data led to a similarly intense session in US markets, which ended the day strongly higher. This positive finish looks set to be more open for European markets, with a focus on the Bank of England rate decision. Also, on the latest US weekly jobless claims.
Today the Bank of England could make history by raising interest rates by 50 bps for the first time since the Monetary Policy Committee was established in 1997.
Glencore posted a huge increase in interim core profit to $10.3 billion on record coal and gas prices. The company said the group’s adjusted core profit rose to $18.9 billion, 119%. According to Retailer Next, sales in the first half were dominated by a sharp reversal of the previous year’s closing trends. In the next quarter, full-price sales were up 5% year-over-year. This was driven by a 0.2% increase in online sales and a 12% increase in retail sales. The FTSE 100-listed group also raised its full-year profit guidance to £860.0m, up £10.0m.
