A drop in the Ibovespa index, attractively priced shares, flush with cash and less indebted companies. The combination of these factors led to a strong growth in the opening of share buyback programs, especially in the second half of the year, when stocks fell the most.
According to Brazil’s securities market authority CVM’s database on the subject, from January to December last year there were 108 programs opened, against 75 in the previous year, an increase of 44%, and December, with 18, was the month with the most buybacks.
January seems to maintain last year’s pace, with eight announcements in the first 17 days of 2022.
“The Brazilian stock market had a very important sell-off, going to around 100,000 points from 130,000 points in a few months,” said Carlos Eduardo Sequeira, head of research and analysis for Latin America at BTG Pactual.
The Ibovespa closed 2021 down 11.93%.
He adds that the value of the stock market, as a whole, is at levels considered attractive, trading below the historical average. “Companies design their budgets for the coming year at this time in December. They must have felt comfortable making their announcements, as well as taking advantage of the fact that stocks are cheap,” he said.
Buybacks are a way for public companies to give more resources to shareholders. The repurchased stocks reduce the amount in circulation and, therefore, increase the participation of investors in the distribution of dividends. The tool is also used to show confidence to the market that prices will rise.
That was the case of logistics company Sequoia. In the announcement of the buyback program, this month, the company made it clear that it considers its stocks cheap. “In the view of the company’s management, the current value of its shares does not reflect the real value of its assets combined with the prospects of profitability and generation of future results,” it says in the document.
Bradesco, which usually is not very fond of buybacks, started to use them more actively last year, amid pressure on financial sector shares caused by the pandemic and increased competition. When the bank announced the measure in April, it said it would adopt buybacks as an instrument to manage its capital level and as a complement to shareholder remuneration.
“Large companies, like Vale and banks, regularly leave their programs active, for when needed. Other companies, on the other hand, had a strong drop in prices and repurchased the shares for a cheaper amount,” said Rodrigo Moliterno, head of equities at Veedha Investimentos.
Construction was one of the sectors that most announced buybacks in 2021, in line with the performance of the segment’s shares, which fell 31%, said Rafael Passos, a partner at Ajax Capital. However, he notes that other activities linked to the domestic economy also underperformed. “Local companies suffered a lot. The same happened with consumption. Several, including retail, announced buybacks. Consumption had a devaluation of 26% in the stock market,” he said.
Antonio Marcos Samad Júnior, CEO of the proprietary desk Axia Investing, points out that the inflation and high interest rate scenario added to the elections “punished” many companies as investor fled. “Many companies are trading below their equity value, which makes no sense if the company is in good financial health.”
In addition to the downward prices, the fact that companies are capitalized contributed to the buyback drive. In 2021, many companies went to the market and are with comfortable financial statements positions, Mr. Sequeira said. For this reason, he states that it is “not surprising” that the wave of announcements will extend into 2022. “The consolidated debt of listed companies or the size of leverage has fallen a lot in recent years.”
A survey by BTG with 200 companies listed on the B3 suggests net debt ratio at 3 times in 2015, when the country entered into recession. The bank estimates that the indicator has fallen to close to 1.2 times last year.
In addition, companies have been pricing this year’s elections, which tends to drive volatility in the stock market. “After the election, I am reasonably confident that the Ibovespa will trade at higher values than today, regardless of who wins [for president],” said Mr. Sequeira, with BTG.
Mr. Moliterno, with Veedha, also believes that buybacks will continue at strong levels, and that companies may end programs already unveiled and start new ones if stocks remain at low prices. “It is natural, since we have had a very sharp drop in the stock market. Companies are likely to keep their programs active as a way to protect themselves from sharper swings.”
Companies can buy back up to 10% of the total outstanding shares, but the programs are not always that comprehensive. Nor does the company have to buy back the entire amount announced. In general, announcements state the maximum amount that can be repurchased. “The volume rose in 2021 compared to 2020 and is likely to increase again this year,” said Mr. Sequeira, with BTG, without detailing the amount purchased.
For Enrico Cozzolino, a partner and head of analysis at Levante Ideias de Investimento, there is no one better than the company itself to know if its stock is cheap. “The company may have a lot of cash on hand and instead of allocating the capital in an investment with daily liquidity, but a bad one, it can buy shares thinking of the more attractive ROE [return on equity],” he said.
Source: Valor international