If you need reassurance that the world can return to the way it was prior to the advent of COVID-19, you might take comfort in this: One aspect of daily life for dozens of retail companies that came to a halt when the pandemic crisis began has come back, with a vengeance.
Stock buybacks are back, big time.
A deadly virus couldn't kill them. A brief financial panic and economic downturn merely slowed them down. And unlike uncomfortable work clothes or full-time office life, there is today no sign or speculation that they might go permanently out of fashion in the corporate world.
Large and small, healthy and rickety, many if not most publicly traded retailers halted the practice of repurchasing their own stock last spring. Without exaggerating, it would have been insanity for most discretionary brick-and-mortar retailers to continue spending their cash buying up stock while staring down the barrel of indefinite store closures, revenue collapse, and a protracted public health and economic crisis.
Even staid and "essential" retailers like Walmart and Target that stayed open paused their buybacks as they hoarded their cash and the industry managed unprecedented levels of uncertainty. Little by little, though, companies have returned to their pre-pandemic financial and operating norms.
Among the largest retailers, buybacks have surged far past pre-pandemic levels. Rising profits and sales give them the confidence to do so. With much of those sales supported by government stimulus spending, shareholders can in part thank taxpayers for the gains they've made this year.
Meanwhile critics of the practice say buybacks divert profits out of the company, choking off investments in business infrastructure and workers.
Bonuses for stockholders
Buybacks are so common in retail, and indeed across the corporate world, they can easily pass unnoticed from quarter to quarter until they came to a dead stop.
Retailer after retailer last year included a pause on buybacks among the actions they took to protect their business as COVID-19 began to take hold in the U.S.
Target, for example, suspended its repurchase program "in light of a high level of uncertainty in the current environment," Chief Financial Officer Michael Fiddelke told analysts in May 2020. "This decision was prudent and consistent with our long-term capital deployment priorities, in which share repurchase only occurs when we have excess cash within the limits of our middle A credit ratings after we've fully invested in our business and supported our dividend."
But this year, the landscape is very different. Consumer demand has surged back, supported by vaccines, the economy and government stimulus. Many of the largest retailers found they actually did quite well during the pandemic, despite considerable volatility and unprecedented uncertainty, and have even gained customers and market share.
Shareholders are reaping the rewards of the brighter outlook.
The financial story of the world's largest retailers is interesting in itself. In the second quarter of 2019, Walmart, Lowe's and Home Depot, for example, all repurchased more than $1 billion in stock. In Q2 2020, that number was $0 for all three, and for most other Fortune 500 retailers as they grappled with pandemic volatility.
Looking at Q2 this year, those three retailers spent a collective $8.5 billion on buybacks.
Buybacks by the largest U.S. retailers
|Company||Q2 2019||Q2 2020||Q2 2021|
|Walmart||$1.6 billion||$0||$2.4 billion|
|Costco||$43.5 million||$31.4 million||$179.7 million|
|Home Depot||$1.3 billion||$0||$3 billion|
|Target||$341 million||$0||$1.5 billion|
|Lowe's||$2 billion||$0||$3.1 billion|
|Best Buy||$230 million||$0||$396 million|
|Dollar General||$185 million||$602 million||$699.8 million|
|TJX Cos||$300 million||$0||$300 million|
|Dollar Tree||$88.4 million||$0||$700 million|
Source: Press releases, SEC filings. List includes U.S.-based retailers on 2021 Fortune 500 list. Since fiscal years vary by company, in some cases we used data from the quarter that most closely aligns with the calendar year
Walmart bought back $2.4 billion of stock in Q2 — well beyond its 2019 repurchases, and obviously quite a bit more than last year's zero buybacks as well.
It's also some $800 million more than Walmart spent on additional bonuses to its workforce during the entire year of 2020, when its associates were on the front lines of the pandemic. Q2's buyback money would be enough to give each of Walmart's 2.2 million associates nearly an extra $1,100 today, when retailers are scrambling to hire and retain workers.
While Walmart has announced wage increases and more full-time hiring, some of its workers have been calling for more.
"Reinvestment of even just a portion of the billions that they're spending on buybacks could actually fund sizable [wage] increases," Bianca Agustin, corporate accountability director at the worker activist group United for Respect, said in an interview. Members of the activist group who are also Walmart shareholders have pushed the company in the past to match any buybacks with an equal amount for Walmart's associate stock purchase plan.
Walmart is by no means alone. In Q2, Lowe's executives expected to pay $91 million in bonuses to workers through its profit-sharing program. Lowe's shareholders, meanwhile, were rewarded with $3.1 billion in buybacks. Given to the home improvement retailer's 300,000 associates, that would have amounted to $10,300 per worker.
For the full fiscal year, Lowe's plans on buying back $9 billion of its own stock. The home improvement retailer is also helping to lead the way in resurrecting the pre-pandemic practice of funding buybacks with borrowed money.
In September, Lowe's announced a $2 billion bond offering. The company listed share repurchases first among possible uses of cash from the debt issuance, followed by business-related activities like acquisitions and capital expenditures.
For a company with a robust performance and paying low interest rates, such as Lowe's, borrowing to buy back stock may not raise many eyebrows. But even for healthy companies, the practice creates extra risk by adding a new liability for something that does not bring a return as an investment in the business would. (Companies can in theory resell the stock they buy on the market for a profit, but research has shown they rarely do.)
"We just never like to see when retailers borrow to do repurchases," Pulse Ratings CEO Dennis Cantalupo said.
A sunnier outlook
In the abstract, money spent on buybacks could be spent on anything. It could go to employees, store improvements, tech infrastructure and so on. You would be hard pressed to find a retailer that couldn't benefit from additional investments in any of the above.
Take Bed Bath & Beyond. The home goods retailer has been in turnaround mode for years now and has revamped its C-suite starting with the arrival of CEO Mark Tritton from Target.
The company's Q2 brought falling comparable sales and a $73.2 million net loss — following a bright performance during the pandemic. It serves as a reminder that Bed Bath & Beyond's transformation is not complete. Coming off the disappointing quarter, the retailer announced it will nearly double its share repurchases for the fiscal year, wrapping up early a plan to spend $1 billion total over three years on buybacks.
Best Buy, to take another example, laid off thousands of full-time employees early in the year as it tries to adapt to a digitally driven landscape. Just months later during the summer, the retailer's CEO, Cori Barry, told a CNN reporter about the difficulty recruiting employees in a tight labor market.
At the same time, during Q2, the company spent $396 million on buybacks. With that money — just as a thought experiment — Best Buy could afford to offer nearly 7,400 associates a $50,000 annual salary.
And that's just one quarter. For the full fiscal year, Best Buy plans to spend $2 billion on buybacks. In February, its board greenlit a new $5 billion buyback plan.
Others have announced new buyback initiatives as well. Target, which is performing as well as any legacy retailer could really be expected to, announced a new, $15 billion stock buyback program approved by its board that will take effect after the company's $5 billion repurchase program wraps up.
Macy's, which suffered one of the deepest financial blows among retailers during the worst months of the pandemic era, reinstated its share repurchase program after Q2, with the board authorizing buybacks of up to $500 million.
"Their balance sheet is about what it was heading into the pandemic," Cantalupo said of Macy's. "Their margins are improving. Yes, I'd rather see them take that cash and continue to pay down debt. But the shareholders view things a little bit differently than a credit analyst."
In the same press release announcing its half a billion dollar share repurchase program, Macy's posted a comparable sales increase topping 60% and, perhaps more importantly — a two-year rise in comps of nearly 6%. Its sales had not only recovered from 2020 but had moved on.
The strong uptick in sales has put retailers on stronger financial footing, fueling confidence in companies and the industry at large, which is likely what is driving companies like Macy's to restart their repurchases after suspending the programs last year.
In a September interview, Sarah Wyeth, senior director and sector lead at S&P Global Ratings, said none of the reported repurchases in the retail world this year raised alarms or negatively impacted credit ratings.
"Buybacks are being done still within financial policies, and the fundamentals back it up," Wyeth said. "There's a little bit of caution in completely reverting back to their balance sheet and policies before the pandemic. But … the risks are abating."
In terms of resilience against adversity, like a pandemic or a bummer quarter, buybacks at least have the advantage of flexibility. They are a rolling activity.
"The thing about repurchases is, it's voluntary," Cantalupo said. "If you're not liking the environment, or things aren't going exactly the way you thought they would go, you don't have to repurchase shares. It's totally based on market conditions."
But often even declining sales and profits don't stop buybacks, not entirely. Sales at Express Inc., for instance, declined for four years in a row after 2015. The apparel retailer scaled back repurchases in some — but not all — years, but did not halt them even as it struggled toward a turnaround, not until the pandemic hit.
The government stimulates shareholder returns
The second quarter was an inflection point for much of retail. At malls, traffic reached rebound levels after the dark and disastrous year of 2020.
Among Fortune 500 retailers alone, the total spending on buybacks in Q2 of this year reached about $12.3 billion. That is more than twice the amount spent on buybacks by that cohort in the same period in 2019 and likely supported by the strong performances of those companies.
And that is just the largest retailers in the world. There are dozens of other publicly traded retailers, many of which engage in buybacks of smaller scale but similar regularity.
To some degree, taxpayers and the government are funding corporate buybacks in retail.
Consumers this year have been spending stimulus cash at retailers, buying goods while still in some measure avoiding travel, restaurants and other experiential spending as COVID-19 continues to circulate.
It would be hard to even guess how much of this year's buyback dollars originated in stimulus checks, but there can be little doubt that a decent chunk of it did.
William Lazonick, president of the Academic-Industry Research Network and a professor emeritus of economics at the University of Massachusetts, said that buybacks were being fueled by public spending to the extent that "profits are being generated by the fact that you're getting up to more capacity and revenues are being supported by huge government spending."
Lazonick pointed out this applies to both fiscal spending such as stimulus checks and enhanced unemployment benefits as well as the Federal Reserve's quantitative easing measures. The latter has lowered the costs of borrowing and supported more debt financing, which in some cases, such as Lowe's, could go to stock repurchases. It has also pushed more money into the stock market as investors seek yield, raising values.
'A significant decline in business investment'
Buybacks weren't always a feature of the modern business and economy. The Securities and Exchange Commission under the Reagan Administration opened the gates with a rule change in the early 1980s that permitted companies to make purchases of their own shares up to 25% of the company stock's overall daily trading volume. Prior to that, most buybacks were deemed verboten market manipulation.
In filings and conference calls, executives themselves frame buybacks as a return to shareholders — meaning they are meant to directly benefit investors. The mechanism for that to happen is stock price increases that coincide with the repurchases, which would have been considered illegal market manipulation some four decades ago.
When Bed Bath & Beyond announced its new share purchase plans, for example, equity analysts with Telsey Advisory Group wrote in a research note that shareholders should view it as "especially" positive. The analysts said that "we estimate [it] has the potential to reduce the share count by 15% and boost 2022 EPS."
It's a simple formula: reduce shares and earnings per share go up with the smaller denominator. That in turn can give share prices a boost, as investors look closely at EPS as a metric. On the other hand, announcements of new capital spending or wage increases may be met with a slump in share price.
"Companies compete against each other now in terms of stock price," Lazonick said. "So if their stock price is not going up fast enough, they do buybacks. For companies, even if they want to, it's hard to pull out of it."
Retail shares may be under especial pressure, with the doom and gloom in the industry of the past five years of bankruptcies and disruption. Among the U.S. retailers in the Fortune 500, only one has not made any repurchases in recent years: Amazon.
It's not hard to see why. At the time of writing, Amazon's stock price was more than $3,500 a share, making for a market cap of nearly $1.8 trillion. By comparison, shares in Walmart — still the largest company in the world by revenue — were worth about $150, and the company's market cap stood at around $412 billion.
Along with market pressures, executives, who receive the bulk of their pay in company shares, are directly incentivized to use company resources to buy back stock. With executive compensation often tied to EPS metrics, buybacks increase the pay of those running the company.
Many companies buy shares in tandem with distributing cash dividends to shareholders. The main difference between them is that dividends favor holders of stock, while buybacks favor sellers. Lazonick and others have argued that dividends make investors more invested in the long-term performance of a company, whereas buybacks favor short-termism.
If shareholders love them, and executives benefit from them, buybacks today are a deeply ingrained feature of the corporate retail world. But the fact that buybacks were made possible through SEC rulemaking implies they could also be halted through the same process.
As it happens, President Joe Biden has publicly criticized stock buybacks in the past. "Ever since the Securities and Exchange Commission changed the buyback rules in 1982, there has been a proliferation in share repurchases," Biden wrote in an op-ed for The Wall Street Journal in 2016, when he was vice president under Barack Obama. "This emphasis on returning profits to shareholders has led to a significant decline in business investment."
More recently, in March of last year, Biden while on the campaign trail urged a halt to buybacks for a full year as the coronavirus began to take hold of the country and economy. Since then, intended or not, Biden's stimulus plans have helped fuel buybacks among retail companies.
Senate Democrats have also considered reining in buybacks through a 2% excise tax on the corporate stock repurchases. Critics of buybacks have said that the proposed tax is relatively paltry and may have little impact. A CNBC survey of CFOs found that a majority said the tax would cause them to buy back fewer of their own shares, while 40% said it would have no impact on their repurchasing practices.
"If they set it at 50%, that might be a good idea," Lazonick said, pointing to an analogy to cigarettes that has come up in the debate. "If you put a small tax on cigarettes, you would raise more revenue and more people would smoke. If you put a very high tax, you're really telling people, 'Don't smoke cigarettes.' It's the equivalent of putting 'These things can kill you' on companies doing buybacks."