Dividends and Pandemic-era boom in IPOs may not reverse equity shortage

For any commodity market, there are forces of supply and demand and you can look at the stock market in the same fashion. For the past decade, there has been a decline in the volume of new shares available to buy, this meant buying was done on the existing shares and that helped power the market’s longest bull run. During the pandemic, companies stopped buying back shares and list equity instead to shore up balance sheets.

In an article by Sujata Rao of Reuters, total share offerings have surged to $700 billion raised worldwide in January-September according to Refinitiv. Although share buybacks dropped, M&A volumes and debt-funded buyouts have increased which typically removes shares from the exchange.

Global net supply share issuance adjusted for delistings and buybacks – totalled $320 billion in the first 10 months of 2020 or an expected $380 billion for the year noted JPMorgan Chase analyst Nikolaos Panigirtzoglou. Last year the net supply was $450 billion,

For years, the biggest buyers of US shares were companies themselves – a trend that spread to Asia and Europe – but global 2020 buyback volumes have fallen to $250 billion or less than an third of 2019.

Linking to dividend paying stocks, when you purchase a stock there are many factors going into the price increasing and one of the factors is the number of shares outstanding. In corporate finance there are times when companies sell shares and there are times companies buyback the shares, it is a normal thing to do. The same is true with debt, traditionally rates do not stay low for years at a time they move up and down. Decreasing the number of shares increases the earnings per share which increases the multiple the shares can trade at. As long as the company is profitable and doing a good job, your total return increases and that is a good thing as you patiently hold the shares.

There are more questions than answers, till the next time – to raising questions.


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