Buybacks to Sellbacks
To grow a factory of two machines to a factory of ten, capital is required; growth isn’t free! We can help as investors in equity and debt, but the impacts of different types of financing extend long past start-up. We’ve got to look out for our stocks!
When stocks are up, most companies can issue more to raise more capital. We’ve seen Carnival do it, the cruise line operator with no revenues. We’ve seen Moderna do it, eager for cash to develop a coronavirus vaccine. We’ve seen Southwest Airlines do it, an investor-favorite flying low with no passengers. It’s a survival skill!
These companies are taking advantage of the precarious market rally just in case it doesn’t hold. “If you even remotely have a need, you should get it done now,” said Bank of America analyst Ryan Parrish about issuing new shares.
The share count is multiplying for embattled companies, and as new share issuances fall from the sky, investors need to dodge ‘em. You wouldn’t want your one-tenth slice of pie split in half by someone cutting more slices “worth the same,” but that’s the state of play!
Issuing shares is the opposite of a buying back stock, too, when a business popularly purchases its own stock to boost returns. The business is selling off ownership and waving its receipt on prior buybacks, which isn’t a huge vote of confidence from executives under “raise to survive” circumstances (growth plans shelved).
The silver lining is that buybacks were never perfect. They’re like another form of leverage in the sense that a business is betting on itself, putting its neck on the line to perform. The past three months have been a wake-up call for managers; growth isn’t free, so hopefully that means less blind buybacks and more underlying successes for investors!
