An Aggressive Style of Share Buyback Is Having a Moment

livemint.com:

In a cooling market for share buybacks, $10 billion commitments from both carmaker General Motors and aerospace-and-defense giant RTX stand out for their irreversibility as well as their headline value. The companies had better be right that they won’t need the cash. RTX and GM have both entered into blockbuster accelerated share repurchase agreements with banks in recent weeks—an aggressive form of buyback that requires sending all the money out of the door at once.

Thanks to these transactions, ASRs are on track for their second-best quarter since the start of the pandemic, according to data provider VerityData. Health-insurance provider Cigna is also planning an ASR next quarter as part of a $10 billion buyback program following the collapse of its anticipated tie-up with Humana, it said Sunday. Buybacks make sense if companies have accumulated more cash than they pay out in regular dividends or can profitably invest, and if their shares are undervalued.

While politicians worry about the tradeoff with investments, the valuation condition is the problem for shareholders. Big companies are typically more focused on return of capital than return on capital, says Ali Ragih, a senior analyst at Verity. They cut buybacks after the pandemic stock-market crash of 2020, for example, only to ramp them up as shares got more expensive.

That said, the latest ASRs look to be exceptions. Both RTX and GM shares were close to multiyear lows when the companies launched their programs in late October and late November, respectively, following runs of bad news. GM’s stock was trading at four times earnings, hit by a protracted strike and delays in its electric-vehicle and driverless-taxi programs.