Canadian companies have spent billions in recent years buying back their own shares with little pushback from Parliament Hill, but that could soon change as some of those same firms line up for federal bailouts.
Until about a month ago, Canadian companies were steadily repurchasing their own stock as a way to return more money to shareholders and bolster share prices, which last year helped fuel a 20-per-cent surge in the S&P/TSX Composite Index.
The coronavirus crisis is forcing companies to cancel those plans as they scramble to preserve cash. But another reason for executives to dump that game-plan is to avoid offending a newly important constituency: taxpayers.
Some of the businesses that were big buyers of their own shares will be beneficiaries of various federal support measures, such as the $73-billion wage subsidy program, which is now accepting applications. And with industry-specific packages still in the pipeline, companies have an incentive to stop doing anything that might make them look greedy.
Pre-coronavirus buybacks and any effects on the taxpayer now “should be of serious concern for governments who might be interested in taking equity or debt positions in big corporations,” said David Macdonald, an economist with the Canadian Centre for Policy Alternatives think-tank, in an email.
The prospect of bailing out companies that splurged on stock buybacks before the pandemic has emerged as a political concern in the United States, where even President Donald Trump, who generally sides with business, has suggested support for companies should come with restrictions on repurchases.
Canadian politicians haven’t had much to say about the issue. Their tongues could be loosened, however, by the large amounts companies committed to share repurchases in recent years instead of rainy-day reserves, and the massive amount of money the government is about to spend to stave off bankruptcies by companies that say they are now starved for cash.
“As soon as you put federal funding into the mix, and taxpayers essentially providing a backstop to a lot of companies that had been rewarding shareholders generously, there is going to be a debate,” said Kevin Thomas, CEO of the Shareholder Association for Research and Education, a not-for-profit group that works with institutional investors on responsible strategies.
Canadian companies may not have been drawing as much attention as their American counterparts, some of which were using debt to buy back stock, but they had been growing fond of buybacks.
A CIBC World Markets analysis last June found that share repurchases by S&P/TSX Composite Index companies had climbed to almost $50 billion for the year ending March 31, 2019, a new high. Separately, a recent FactSet analysis found common and preferred share buybacks by companies in the smaller S&P/TSX 60 index were $46.18 billion in 2019, down from a record $57.95 billion in 2018, but still the second-highest annual amount this millennium.
Furthermore, FactSet found that while operating cash-flow among the 60 firms had increased by 50 per cent in 2019 over 2018, capital expenditures declined year-over-year, “which indicates that companies were not proportionally investing in long-term growth opportunities,” FactSet vice-president Arjun Deiva said in an email.
Some of the biggest buyers of their own shares in Canada have been mature firms, such as railways, banks, and energy companies. For various reasons, the profits of many of those companies far outstripped their operational costs, allowing executives to give extra cash back to shareholders, and to help boost stock prices by reducing shares in circulation.
However, a scan of financial results shows a wide range of firms that were buying back stock, and that could now be seeking government largesse.
Ski-Doo and Sea-Doo-maker BRP Inc. repurchased approximately $450 million in subordinate voting shares for the year ended Jan. 31, but was forced by COVID-19 to temporarily suspend or slow down manufacturing operations, as well as lay off hourly workers. On April 15, BRP said it would further cut costs, reduce executive pay and aim “to access government emergency relief measures and wage subsidy programs, where available, in order to mitigate the impact on our employees.”
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Similarly, Montreal-based Air Canada, which bought back $378 million in shares in 2019, said earlier this month that it would use the federal government’s wage-subsidy program for its 36,000 Canadian-based workers, around 16,500 of which it previously said would be temporarily furloughed. The carrier suspended its buyback program in March.
Air Canada rival WestJet Airlines Ltd. said it also plans to use the federal government’s emergency wage subsidy to keep workers on its payroll. Yet prior to its acquisition by private-equity firm Onex Corp. in December, WestJet noted it had returned approximately $1.2 billion to shareholders since beginning dividend and share repurchase programs in 2010.
The energy sector will be another industry getting considerable government help, as it struggles to survive the double whammy of the coronavirus and a collapse in crude prices.
In addition to wage subsidies and loan programs (as well as the Alberta government’s agreement to provide a $1.5-billion equity investment and a $6-billion loan guarantee to ensure construction of Calgary-based TC Energy Corp.’s Keystone XL pipeline), the federal government has set aside up to $1.72 billion to clean up inactive oil and gas wells and up to $750 million for an “Emissions Reduction Fund.”
But the oil-and-gas industry also has been big on buying its own shares. For example, Suncor Energy Inc. said in February that it had repurchased $6.7 billion of its own stock since the start of 2017. The company could use some of that cash now. On March 23, after oil prices crashed, Suncor said it was cutting its capital spending plans by around $1.5 billion for 2020, as well as suspending share repurchases.
No Canadian company caused the current crisis, and likely few, if any, predicted the coronavirus pandemic, or how damaging it could be. At any rate, buybacks are being put on hiatus, whether at the discretion of companies or, in the case of Canada’s big banks, under orders from their regulator.
The practice was beginning to receive increased scrutiny even before COVID-19, with executives coming in for criticism for using profits to juice share prices instead of spending them on more research and development, higher wages or other investments.
A CCPA study released last August found companies in the S&P/TSX Composite Index with defined-benefit pensions had deficits in those plans of around $12 billion in 2017, and yet those firms returned approximately $16 billion to shareholders in buybacks and $50 billion in dividends the same year. “There’s been a long-term trend towards less long-term preparedness in the corporate sector and more towards short-term profits,” Macdonald said.
The upshot is that executives who embraced share buybacks in the good times — as well as those currently planning repurchases to bolster fallen stock prices — could face doubts about whether they can be handed public funds without some strings attached.
As lawyers from Borden Ladner Gervais LLP recently wrote, there are corporate solvency requirements to consider when it comes to buybacks. And in late March, Canadian airline unions, which stood to gain from whatever help their employers received, expressed doubt that their corporate bosses could be trusted: they said government support for the carriers should come with restrictions on executive pay, dividend payments and share buybacks.