- ECB's expanded bond-purchase plan to include corporate debt
- Lower debt-refinancing costs will spur buybacks, says JPMorgan
European firms may boost share buybacks following Mario Draghi’s latest round of stimulus measures, JPMorgan Chase & Co. said.
Lower debt-financing costs and less financial distress will encourage the region’s companies to issue new debt and thus increase share repurchases, JPMorgan analysts including Nikolaos Panigirtzoglou wrote in a report dated March 11.
The “elevated equity risk premium makes it attractive for euro-area companies to imitate their U.S. counterparts and issue debt in order to buy back their own equity,” they wrote. “We see an increased probability that share buyback activity will improve in Europe from its current dormant phase.”
European Central Bank President Draghi said last week investment-grade corporate debt will now be eligible in its asset-purchase plan to bolster growth. JPMorgan estimates the ECB will buy 2.5 billion euros ($2.8 billion) to 5 billion euros of corporate bonds a month on the secondary market, and 1 billion euros on the primary market, which may increase if the program spurs more debt issuance by companies seeking to buy back their shares.
European shareholders have historically preferred dividend stocks -- deemed safe and income-paying -- over buybacks. But that may be changing, after a rout this year prompted investors to seek firms confident enough to repurchase their own shares, JPMorgan strategist Emmanuel Cau said last month. A gauge of stocks linked to buybacks tracked by the bank is down 2.1 percent this year, versus 5.8 percent for the broader Stoxx Europe 600 Index.
On Monday alone, companies from both sides of the Atlantic came to Europe’s corporate bond market with deals amounting to 6 billion euros as they sought to capitalize on the added stimulus. U.S. engineering and construction firm Fluor Corp. is among highly rated companies selling bonds, while Deutsche Telekom AG is offering securities in its first euro sale in almost three years.
Yields on highly rated euro debt have dropped since the ECB meeting, falling to 1.22 percent, the lowest since June, Bank of America Merrill Lynch Index data show.