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General Electric, Amazon, and the New Wave of Stock Buybacks

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Amazon, which hadn’t bought back stock since 2012, just announced it would buy back $10 billion in shares.

Chet Strange/Bloomberg

Buybacks are back—and that’s good news for investors trapped in a volatile market.

This past week, two companies that have very different histories with share repurchases announced big buyback plans.


Amazon
.
com (ticker: AMZN), which hadn’t bought back stock since 2012, said it would buy back $10 billion in shares, while


General Electric

(GE), which had squandered billions buying back stock before CEO Larry Culp took over the fallen industrial titan, announced plans to repurchase $3 billion worth of shares

While Amazon and GE got the headlines, they weren’t the only ones buying back shares.

S&P 500
companies have announced the planned repurchase of $238 billion worth of stock through the end of February, a record for the first two months of the year, according to Goldman Sachs data. All told, Goldman expects U.S. companies to buy back a record $1 trillion in 2022, up 12% from $991 billion in 2021. Share repurchases are back in vogue.

That’s good news, according to Goldman strategist David Kostin. Companies announce buybacks when they’re feeling good about their business and when they’re confident in their ability to execute. And despite the stock market’s recent troubles, they’re buying back shares.

“Authorizations have historically been a signal for executions in the subsequent year,” Kostin writes. “YTD authorizations are also tracking above the record pace from 2021, pointing to managements’ belief that firms have excess liquidity.” 

Even a less optimistic view of corporate earnings might point to more buybacks, not less. The Federal Reserve is expected to raise interest rates on Wednesday, something that could slow the economy—and earnings growth. If that’s the case, the easiest way to boost profits would be to reduce share count, explains Dennis DeBusschere, 22V Research’s chief market strategist. “With profitability likely to come under pressure as the Fed fights inflation, we expect to see buybacks accelerate in 2022,” he writes.

That shouldn’t be wasted money. Buybacks can help put a floor under stocks, DeBusschere notes. Goldman’s basket of companies buying back the most shares has declined 8% this year—painful, but still better than the

SPDR S&P 500
exchange-traded fund’s (SPY) 10% decline. Stocks in the basket include


Advance Auto Parts

(AAP),


Apple

(AAPL),


Kroger

(KR), and


Lowe’s

(LOW).

Of the week’s two buyback surprises, GE’s might be the more shocking. Yes, Amazon hasn’t bought back stock for years, but with new CEO Andy Jassy replacing Jeff Bezos, a change in capital-allocation strategy was always a possibility. And while MKM analyst Rohit Kulkarni doesn’t expect Amazon to decrease its share count, it should reduce the amount it dilutes shareholders with stock compensation.

GE has been selling off pieces and planning to break up as it tries to emerge from the disaster that was the Jeff Immelt era. It also has $25 billion in net debt it needs to trim. Culp, however, seems to have a plan, and the buybacks might just be another way for him to signal his confidence to investors. “The buyback move arguably is intended to reflect confidence in the company’s financial targets”—$7 billion of free cash flow in 2023—“based on which its valuation looks low,” writes Barclays analyst Julian Mitchell. 

Let’s just hope the strategy works out better this time.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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