Global ratings agency Fitch said more big, investment-grade companies in the United States may start returning money to shareholders if share prices continue to slide or remain low.
It pointed out that such return of money through stock repurchases can impact the credit rating of companies (due to a deterioration of their credit to equity ratio), but companies seem to be willing to take the risk.
“The pace of shareholder-friendly actions by investment-grade corporates began to pick up significantly in early 2011, and accelerated last September as a sell off in global equities and persistently low borrowing costs sparked more share repurchases…
“A similar pattern may be taking shape in second-quarter 2012 as share prices have declined sharply from early 2012 peaks in response to growing concerns over euro zone contagion risk and the global slowdown,” it pointed out.
Companies typically return money to shareholders — either by buying back shares and ‘extinguishing them, or by declaring dividends — when they don’t see better ways to spending cash. They are also more prone to giving back cash to investors when the credit market is strong and they are assured of getting a loan if they need cash.
“Lacking compelling growth capex and acquisition opportunities, many investment-grade corporates may again be forced to evaluate shareholder-friendly (and typically bondholder-unfriendly) actions in the second half of the year to boost equity returns in a slow-growth environment,” Fitch said.
Fitch, being a credit-rating organization, sees the trend as a negative, though the move will help stock prices. It warned that companies may be exposing themselves to too much risk by taking easy credit for granted.
It noted that many companies have been ‘downgraded’ from a creditworthiness perspective due to such actions — a move that makes it more expensive for them to borrow.
“The surge in share repurchase activity has reflected not only favorable market conditions, but also a willingness on the part of some management teams to move down the credit spectrum, trading off a degree of financial flexibility for equity returns.
“In a benign credit environment investment-grade corporates have not paid a stiff price for this trade off. Still, it leaves companies with reduced flexibility to respond to future economic shocks and tightening credit market conditions,” Fitch warned.
Repurchase programs, often leading to downgrades, have been accelerated in the retail, pharmaceutical, consumer, technology, and media sectors over the past year, Fitch added.
Since the beginning of 2011, there have been 12 negative rating actions taken on investment-grade U.S. corporates as a result, at least in part, of increased share repurchase activity. This compares with only three similar actions in 2010, Fitch noted.