When it comes to buying back their own stock, many of Canada’s biggest companies put the chequebook away in 2023 – a sharp contrast from the record high for share repurchases the previous year.
Through the first three calendar quarters of 2023, the members of the S&P/TSX 60 Index of large companies spent a little more than $24-billion on stock buybacks, according to data from S&P Global Market Intelligence. In 2022, they spent nearly $58-billion over the entire year.
The 2023 slowdown has been widespread, with only four companies already spending more on share repurchases in 2023 than in 2022, and just nine reaching 75 per cent of their 2022 levels by the end of the third quarter. There are 34 companies whose 2023 buybacks are behind full-year 2022, and many weren’t close enough to make up the gap in the fourth quarter.
At the same time, dividends were on pace to surpass 2022 levels by the end of the year, according to the data.
There are multiple reasons for the pullback in repurchases. Many of the biggest buyback reductions were by resource companies that saw price declines in their product. Oil prices, for example, fell sharply in the second half of 2022, crunching cash flow and causing a rethink of 2023 capital-return plans.
Other companies made acquisitions or boosted capital spending, which helped pushed debt levels higher, making buybacks unpalatable.
Still, buybacks are here to stay, says Ian de Verteuil, an analyst with CIBC World Markets Inc. He authored a June report called “Record Level For Canadian Payout Yield,” noting the 2022 jump in buybacks, coupled with the ever-present Canadian love of dividends, had pushed the payout yield of large Canadian companies past that of U.S. S&P 500 Index stocks in 2023.
While the drop from 2022 is meaningful, 2023 may still turn out as one of the highest years for buybacks in history. In the last full prepandemic year of 2019, for example, S&P/TSX 60 companies spent $25-billion on buybacks.
“Buybacks will be an important part of returning capital to shareholders,” Mr. de Verteuil said, noting that individual investors pay 40 per cent tax on dividends, but just 27 per cent on capital gains. “I think it’s going to be more of a feature than it was in the past in Canada.”
Stock buybacks and dividends are the primary way for companies to return capital to shareholders.
The idea with buybacks is that companies are showing confidence in their undervalued shares by buying them. As a bonus, they take stock off the market and cancel it, thereby reducing their share count and making each remaining share more valuable.
There’s another side to the buyback coin, however. Studies have suggested many companies have notoriously bad timing, repurchasing stock when their shares are at highs, not lows. Some companies have granted so many stock options to employees that when they issue new shares for them, they wipe out the benefits of the buyback programs.
More recently, there’s been a political element to buybacks: Some left-of-centre governments argue that companies spend too much money repurchasing shares, and not nearly enough investing in new production – which would create new jobs and better wages, they argue.
The result has been buyback taxes – first in the United States, and then in Canada. U.S. President Joe Biden proposed a 1 per cent buyback surtax in March, 2021, as part of his “Build Back Better Framework”; it made it into the Inflation Reduction Act, passed in August, 2022. Canada’s federal government lifted the idea, announcing a 2-per-cent buyback tax on companies in its fall economic statement in November, 2022. The tax passed as part of the 2023 budget, and starts Jan. 1, 2024.
Canadian companies might have been expected to rush to complete large buybacks in 2023 to avoid the 2024 tax, but the numbers suggest buybacks were driven by conventional economic decisions about whether it was suitable to return capital to shareholders.
Mr. de Verteuil said resource companies that saw commodity price spikes decided that share repurchases were a better option than big increases in their dividends. A big boost might require them to cut their dividend if and when commodity prices fall.
“If resource companies have unusually high levels of profitability, they have to decide that they’re going to raise the dividend only to a certain extent, because they have lived through the volatility in commodity prices,” Mr. de Verteuil said. “And then, beyond that, they have to figure out what to do with the money.”
Indeed, a particular culprit in the 2023 decline was a pullback on buybacks in the resource sector, with several energy companies cutting repurchases by billions this past year.
Imperial Oil Ltd., spent $6.4-billion on repurchases in 2022, but only $1.3-billion through the third quarter of 2023, according to the S&P Global Market Intelligence data. Canadian Natural Resources Ltd. (CNRL) went from $5.6-billion to $1.8-billion in the first three quarters. And Suncor Energy Inc. went from $5.1-billion in 2022 to $1.9-billion so far in 2023.
With a spike in oil prices in the third quarter of this year, though, some of the energy companies say they picked up the pace in the fourth quarter.
Imperial Oil spokesperson Lisa Schmidt said the company completed its buyback program in the fourth quarter by buying $958-million of stock and did a special $1.5-billion buyback in October. Chief executive officer Brad Corson said in the company’s third-quarter earnings release that the company’s “strong operating performance and portfolio of capital efficient investments” made its dividends and buybacks possible.
Lance Casson, investor relations manager for CNRL, said in the first 11 months of 2023, to Nov. 30, the company purchased about $3-billion of its stock, an extra $1.2-billion beyond the third-quarter numbers. The company’s chief financial officer, Mark Stainthorpe, said on Dec. 14 in a budget presentation for 2024 that the company plans to reduce its debt to its target in the first quarter, and thereafter return 100 per cent of cash flow to shareholders.
Suncor did not respond to requests for comment.
Nutrien Ltd., which collects much of its profit by mining potash, went from $6.1-billion in buybacks in 2022 to $1.4-billion in the first three quarters of 2023.
“We have taken a balanced approach to capital allocation in 2023, allocating approximately $2.7-billion to sustain and grow our asset base,” spokesperson Jordan Eldridge said in an e-mailed response. Nutrien plans to return over $2-billion to shareholders for the year through dividends and share repurchases, he said.
Convenience-store operator Alimentation Couche-Tard Inc. spent $3.6-billion on buybacks in 2022, but only $1.2-billion to Sept. 30 in 2023.
Couche-Tard spokesperson Amine Ndamama said in an e-mailed statement that a proposed €3.1-billion acquisition expected to close by the end of 2023 will take the company’s leverage ratio “close to our stated comfort zone,” so “we have had to reduce the pace of share repurchases. This is a good example to illustrate our financial discipline when it comes to capital allocation.”
As Canada’s most valuable company, Royal Bank of Canada is the 800-pound gorilla of stock buybacks: With a market capitalization of about $185-billion, a normal-course issuer bid to buy back up to 5 per cent of its shares would cost more than $9-billion.
The bank spent $3.2-billion on buybacks in 2022, catching up after Office of the Superintendent of Financial Institutions blocked it and all other major banks and insurers from doing buybacks in the scary first months of the COVID-19 pandemic. But RBC doesn’t have a buyback program going on now, and it’s spent zero in 2023.
RBC spokesperson Fiona McLean noted than in its fiscal fourth quarter of 2022, the bank’s chief financial officer, Nadine Ahn, said it would defer further share repurchases until the anticipated close of its acquisition of HSBC Canada. In its most recent investor call, Ms. Ahn said RBC will look to revisit the reintroduction of share buybacks in the second half of its current fiscal year.
David Milstead