June 18, 2018

Amid record U.S. stock buybacks, CT corporates keep focus on M&A

Photo | Stuart Isett/Fortune, Flickr Creative Commons
Photo | Stuart Isett/Fortune, Flickr Creative Commons
Aetna CEO Mark Bertolini speaks at the Fortune Brainstorm Health conference in March. In the midst of a massive $69 billion deal with CVS, Aetna has curtailed stock repurchasing, which fits into a Connecticut trend, but runs counter to a national boom in the wake of federal tax cuts.
Photo | Contributed
(Top) United Technologies Corp. CEO and Chairman Gregory Hayes. (Bottom) Cigna President and CEO David M. Cordani.
Photo | HBJ File
Photo | Contributed
The Hartford’s CEO Christopher Swift.
Howard Silverblatt, Senior Index Analyst, S&P Dow Jones Indices

In the wake of Congress' $1.5 trillion tax cut late last year, public companies across the country have boosted investor perks like stock buybacks and dividends to record levels.

But here in Connecticut, the picture so far has been mixed, particularly for the state's largest companies.

Aetna, United Technologies Corp., Cigna and The Hartford — all among the largest publicly traded companies in Connecticut — have stalled or indicated they will stall their share buybacks and haven't increased their quarterly dividend payments this year.

Instead, the four companies are hoarding cash to pay for, or are limited by, major pending acquisitions worth a combined $166 billion.

Indeed, M&A activity is providing another avenue for companies to increase shareholder value, and more deals are happening now as firms hold record levels of cash and respond to myriad industry and economic pressures.

"It's definitely a nice year for M&A," said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. "They're all up and the underwriters are very happy."

According to FactSet Research Systems, a Norwalk financial data provider that recently raised its own dividend and authorized a new $300 million stock repurchase program, M&A deals in April totaled $275 billion, the highest amount since Oct. 2016.

In Connecticut, pending deals include CVS' $69 billion acquisition of Hartford-based Aetna; Bloomfield-based Cigna's $67 billion purchase of Express Scripts; and Farmington-based UTC's $30 billion acquisition of Rockwell Collins. In addition, The Hartford completed its $1.45 billion purchase of Aetna's group life and disability business late last year.

Citing the CVS deal, Aetna's board of directors hasn't authorized any 2018 stock repurchasing, an about-face for a company that spent billions on buybacks last year.

Cigna has told its shareholders not to expect further buybacks before its Express Scripts deal closes, which could be by year-end.

Meanwhile, UTC says that it needed to suspend its stock buybacks to "help manage the cash flow and liquidity resulting from the pending [Rockwell] acquisition."

Like Cigna, The Hartford has also said, back in October before the tax cuts were passed, that it expects no share repurchasing in 2018, choosing instead to use those funds to help pay for its recent Aetna purchase.

The Hartford hasn't reversed that decision post-tax cuts, but more recently, The Hartford's CEO Christopher Swift said during an earnings call that the company is aiming to make the best use of its available capital to create shareholder value, whether from tax savings or its recent sale of its run-off life and annuity business, the Talcott Resolution.

" … We continue to weigh business opportunities against share repurchases and other capital management actions," he said. "We will not make hasty decisions, and we do not feel rushed to make long-term impactful choices. Rather, we will be patient and thoughtful regarding these matters."

Swift told investors that much of the tax-cut benefit in 2018 will go to The Hartford's bottom line, and that the company is also investing some of the savings in technology initiatives.

CT companies counter U.S. trends

During the first three months of 2018, companies in the S&P 500 spent more than $188 billion repurchasing their own stock, surpassing the previous record of $172 billion set in the third quarter of 2007, Silverblatt said.

In Connecticut, however, first-quarter buyback spending was down 55 percent compared to a year ago — in stark contrast to a 41 percent increase in the S&P 500 over the same period, according to FactSet, which crunched data for HBJ on 29 of Connecticut's largest public companies.

John Butters, FactSet's vice president and senior earnings analyst, said the bulk of Connecticut's decline was due to Aetna's decision to curb its buyback spending by about $3.3 billion in the first quarter compared to a year earlier.

The median decline in first-quarter buyback spending for Connecticut companies was 7.4 percent, compared to a median increase across the S&P 500 of 2.9 percent, Butters said.

While many companies haven't directly cited the federal tax cuts when announcing new share repurchase programs or dividend hikes, analysts and others say the tax cuts are a key factor.

"Record announcements of buybacks twice in one year and just two months after the tax cut was passed, I think you definitely have to link the two," said Winston Chua, an analyst with TrimTabs Investment Research.

While Connecticut companies haven't been overly verbose in explaining their capital managment decisions, UTC CEO Gregory Hayes made direct reference to the tax cuts in May, when announcing that his company would hire 35,000 workers — including 9,000 in Connecticut — and invest more than $15 billion in the U.S. in the next five years.

Speaking to reporters, Hayes indicated that the tax cuts were playing a role in UTC's investment.

The U.S. "now has the most competitive tax system in the world,'' Hayes said.

Aetna CEO Mark Bertolini hasn't said much publicly about the tax cuts this year, as the company hasn't held earnings calls for the past two fiscal quarters due to its pending CVS deal. But Aetna disclosed in January that it expected the tax cuts to add $800 million to its gross adjusted earnings in 2018, half of which it will be required to pass on to its customers.

In addition to shareholder perks and capital investments, at least seven public companies in Connecticut this year have announced employee bonuses and pay and benefit hikes in direct response to the tax cuts.

But analysts and others say companies are likely to spend much more money from their tax windfalls on share buybacks than on employee raises.

For example, Americans for Tax Fairness, a group that has criticized the tax cuts as more of a corporate handout than a boost for the broader economy, has pegged the annual cost of higher wages and bonuses promised by those seven Connecticut companies at about $486 million. By comparison those companies are expected to reap more than $11 billion in annual tax savings, the group estimates.

"Definitely, the money is going to the shareholders and executives of the companies," Chua said.

For corporate boards, an easy call

Stock buybacks, Silverblatt explained, help increase a company's share price, which benefits investors.

"It obviously helps support the stock," Silverblatt said. "Five people bidding instead of four drives up the price."

For corporate boards, buybacks are often an easier call than increasing dividends. For one, there's more flexibility and control. A company can slow or quicken the pace of its share purchasing with a phone call. Plus, the company can resell them.

Raising a dividend, on the other hand, comes with more pressure to perform.

"I've got to make sure I can do that next year as well, because cutting a dividend is a kiss of death, let's face it," Silverblatt said.

U.S. companies increased dividend payments by $18.8 billion in the first quarter compared to a year earlier.

"At this point, given the record cash levels, repatriation and expected record earnings helped by lower tax rates, 2018 could post its seventh consecutive year of record payments," Silverblatt said in April when announcing the dividend data.

Across Connecticut, first-quarter dividend activity was a mixed picture compared to the broader market. While the total value of payments grew 9.5 percent, compared to 7.9 percent in the S&P 500, the median dividend increase here was 5.9 percent, compared to 6.7 percent in the S&P, according to FactSet.

Of the 29 Connecticut companies FactSet assessed, 15 spent more on dividends in the first quarter than they did a year prior.

Editor's note: This story has been modified to make clearer the timeline of The Hartford's statements before and after the tax cuts, related to its share repurchase activity.

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