May is second-busiest month since 2020 in Brazil, with 21 companies launching such programs

06/07/2022

---

São Paulo-based B3: stocks are going through strong correction in 2022 — Foto: Aloisio Mauricio/Agência O Globo

Faced with volatile markets that are sensitive to the global economic scenario, stocks are going through a strong correction in 2022 and companies in several industries, in Brazil and abroad, are launching share buybacks as a result.

In Brazil, share buyback announcements accelerated in May, with 21 companies starting buying back shares, almost four times the number seen in the same month of 2021. This reflects the Ibovespa – Brazil’s benchmark stock index saw the second-worst performance since the onset of the Covid-19 pandemic by falling 10.1% in April.

May was still the second month with the most open programs since March 2020, when the coronavirus triggered an unprecedented global crisis.

This year, 57 companies unveiled buyback programs, more than half of the entire 2021 volume of 108 announcements. The number is 63% higher than the number announced between January and May last year, which had most of the openings concentrated in the second half of the year.

If completely fulfilled, the buyback programs can total R$72 billion, taking into account the current price of the companies. The operations announced in the month alone cover a volume that may exceed R$17 billion if fully executed. Gerdau, CSN, Suzano, JBS, Bradesco, XP, Cosan and Hapvida are among the groups that started buyback programs in May.

This is not a local phenomenon. Share buybacks in the United States are expected to reach a record of $1 trillion in 2022, as companies see their shares depreciating between 15% and 30% in the year to date.

Guilherme Tiglia, a partner and analyst at Nord Research, cites escalating global inflation, the Russia-Ukraine war, the Covid-19 pandemic, and reduced growth in major economies such as the United States and China among factors driving buybacks.

“At times like this, when we see the [financial] market moving sideways and concerned about the global economy, a window of opportunity opens up for companies to do buybacks. It’s a market moment, with discounted stocks,” he said.

He points out that, in the local scenario, there is still the impact of the high interest rate, which reflects strongly on variable income due to the migration of investments to fixed income.

Besides the drop in stock prices, the strong cash reserves of some Brazilian companies — after higher revenues in 2021 — contributed to driving buyback programs last month, said Gabriela Joubert, chief analyst at Inter.

“Companies, especially those linked to commodities, which have revenues in dollars, have a cash surplus. They need to allocate this money. After so many [announcements and payments of] dividends, buyback is also an alternative,” Ms. Joubert said, stressing that stock buybacks are another way of returning profits to shareholders.

The analyst notes that, for the investor, the buyback plan contributes to containing share losses, at first. “We are entering a bear market, so it makes sense for companies to announce buybacks,” she said.

Vale, at the end of April, paved the way for more robust programs with the announcement of a buyback of up to 500 million shares — equivalent to more than R$40 billion — expected to continue until the second half of next year.

In a conference call with analysts held after the announcement of the program, the chief financial and investor relations officer, Gustavo Pimenta, said that the share buyback “is the best investment” the company has, adding that this does not mean the mining company will not pay extraordinary dividends.

“It will depend on the cash flow. We can do both [dividend and buyback], but the buyback has a great prospect,” the executive says.

Ms. Joubert says she disagreed with the buyback announced by the company in October last year, of up to 200 million shares — a program finished this month with the acquisition of all shares for the opening of the current buyback — since it could have been converted into dividends for shareholders.

According to her, Vale wanted to send a message of confidence in the company. “Companies continue to pay dividends, but they also buy shares, sending the message that they are investing in themselves. The message is unanimous. I have surplus cash, I will pay you dividends. But I will also buy shares of my company and do the same, shareholders,” the analyst with Inter said.

Mr. Tiglia, with Nord Research, considers that the share buyback is also a benefit and that, at that moment, it was an allocation of funds that made sense for the company’s strategy.

“There is no such thing as a better or worse proceed. I believe that, at that moment, Vale understood that its shares were cheap, which is consistent with the robustness of the program, and the buyback was the tool that made the most sense in that scenario,” the analyst said.

Daniel Sasson, a commodity analyst at Itaú BBA, said that the program is in line with Vale’s recent positioning, in which it sees no need for investments and expansion in the coming years.

“Therefore, the company is using this surplus by returning cash to shareholders. Another issue is that Vale shares are cheaper compared with its global peers. The company sees this, that stocks are cheap,” he said.

Mr. Tiglia says that Vale shares are at a level below what they could be, even with gains of more than 17% in the year.

Some programs launched in May, weeks after Vale, have the potential of reaching R$1 billion each, including Suzano, CSN and Gerdau.

Gerdau’s chief financial and investor relations officer, Rafael Japur, evaluated that the repurchases of the company and Metalúrgica Gerdau reflect the steelmakers’ cash generation capacity. “We understand that the shares are undervalued in recent months and that the discount is important concerning our peers in North America. That’s why we started the program,” Mr. Japur said.

Ms. Joubert, the executive with Inter, however, highlights the post-purchase and wonders about the company’s goal. “We need to pay attention to what the company will do with that number of shares it bought. Will it cancel it, will it keep it, or will it do a secondary offering to raise money again?”

Mr. Tiglia, the analyst with Nord, said that buybacks can reflect negatively on stock liquidity. “There are programs that don’t change, while others mess a lot with liquidity,” he said. “At the end of April, Vale, for example, had 305 million in treasury stock. The natural path is that it cancels those shares in the coming months and the market is already expecting this,” said Mr. Sasson, with Itaú BBA.

Source: Valor International

https://valorinternational.globo.com/