The global buyout frenzy appears to be coming to an end, and investors are unlikely to mourn the end of the record buyout rush.

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(Bloomberg) – The global buyout frenzy appears to be coming to an end, and investors are unlikely to mourn the end of the record buyout rush.

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Indeed, executives would be well advised to keep their powder dry, given rising interest rates, jittery consumers and growing fears of recession, fund managers say. Goldman Sachs Group Inc. strategists say buybacks peaked in the first quarter and cut their outlook for S&P 500 buybacks by 10% for 2023, citing the impact of margin squeezes on earnings.

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With companies having made record buyouts, they can now focus on allocating their resources elsewhere, such as mergers and acquisitions, long-term investments or debt reduction, said Kim Forrest, founder of Bokeh Capital Partners. .

“If you’re heading into uncertain times and you’ve made big buybacks, you as a company can just tread water and your EPS will go up or stay the same because you now have a smaller number of shares” , Forrest said in an interview. . “It’s a way for companies to show their best side.

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It’s a view also reflected in this month’s survey of global fund managers from Bank of America Corp., which found that 60% of investors want companies to improve their balance sheets, while only 17% recommend returning cash to shareholders.

For businesses, buyouts make sense right now. Equities in Europe are the cheapest in 10 years, while those in the United States are showing long-term average valuations with foam washed away by this year’s rout. This at a time when companies are posting near-record margins and have relatively healthy balance sheets.

American companies are on course to achieve a record $1.25 trillion in buyouts this year. After that, buyout growth is expected to slow as lower earnings growth, shrinking cash balances and recession fears will likely limit spending, according to Goldman strategists led by Ryan Hammond.

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Goldman’s Kostin expects fewer buyouts next year (video)

Energy companies topped the buyback scorecard as profits jumped on higher oil prices, and now account for 5% of total S&P 500 buybacks, up from less than 1% in the first half of the year. year, according to Goldman. But that trend will likely be offset by lower share buybacks from financial companies as they seek to meet capital needs and prepare for an economic crisis, strategists said.

Among the energy majors that have made buyout announcements so far are TotalEnergies SE, which has a $7 billion share buyback program for 2022, while Shell Plc said it would buy 4 billion more worth of shares over the next three months, bringing total buybacks for the year to $18.5 billion.

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In the United States, other recent examples of major takeovers include defense contractor Lockheed Martin Corp. and aerospace technology maker L3Harris Technologies Inc. Tesla Inc. CEO Elon Musk said the company could repurchase up to $10 billion in stock next year. .

In Europe, the earnings season is setting the stage for an extension of what is already a record year for takeovers. Among banks, UBS Group AG said it expects a “hardware” program next year, while HSBC Holdings Plc plans to buy back shares in the second half of 2023. Chipmaker ASML Holding NV will provide an update on the issue Nov. 11 after stronger than- expected results. Cement maker Holcim has announced that it will launch a share buyback program of up to 2 billion francs ($2 billion) next month.

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The UK has seen a particularly high level of takeover activity this year, with Imperial Brands Plc joining in the announcement of a billion pound scheme.

But the outlook is deteriorating. Strategists at Bank of America and Morgan Stanley expect further downward earnings revisions as rising energy costs and wages put pressure on margins. At least the companies have the advantage that it is easier to cancel a buyback program than to cut dividends.

The takeovers have also drawn some scrutiny in Washington. Earlier this month, US President Joe Biden called on energy companies to reinvest their earnings in new production rather than giving more money to shareholders. A new 1% tax on redemptions taking effect next year will remove $1 from S&P 500 earnings per share in 2023, JPMorgan Chase & Co estimates.

—With assistance from Benedikt Kammel and Nathaniel T. Welnhofer.



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