August 1, 2018 / 12:04 PM / 2 months ago

A bad sign? Argentine companies launch buyback wave

BUENOS AIRES, Aug 1 (Reuters) - Argentine companies have launched the biggest wave of share buybacks in a decade, a Reuters review of securities filings shows. The firms say the buybacks show faith in their share prices, but some skeptical analysts see a hesitancy to invest that may signal the economy is sliding toward recession.

The last time Argentine companies embarked on buyback programs on a large scale was during the 2008-2009 financial crisis that plunged Argentina into recession. The only other time was in 2002, when the country defaulted on its foreign debt and the economy collapsed.

Six companies have announced new share repurchase plans totaling $721 million this year, with electricity and energy producer Pampa Energia’s $400 million plan leading the pack, the Reuters review showed.

In the filings and in interviews with Reuters, companies said a broad selloff in Argentine assets amid a run on the peso currency had left them undervalued. Buybacks would protect share prices and eventually reward investors who held on, they said.

Analysts said that made financial sense but noted that the two previous waves of buybacks coincided with the 2009 and 2002 recessions.

“Those are the politically correct responses. It is what they have to say,” said Marcelo Trovato, a stock market analyst at Pronostico Bursatil in Buenos Aires, who called the rise in buybacks a “very bad signal.”

“The capital markets anticipate what you later see in the real economy,” he said.

After a two-year stock market boom fueled by optimism over President Mauricio Macri’s reform agenda, the benchmark Merval index has tumbled as much as 30 percent off its record-high this year.

Pampa’s shares fell as much as 33 percent, prompting the company to dedicate $400 million to buybacks, investor relations officer Lida Wang said. Pampa had budgeted $650 million in capital spending this year, mostly in power plants, wind farms and shale gas and would not cut back despite fears of a looming recession, she said.

“It is not that we are going to postpone capital investments because we are doing share buybacks,” Wang said. “Buybacks are something we are doing of our own accord to boost the share price and give a signal that we have faith in these assets, and that we see them as very cheap.”

Two companies Pampa controls, electricity distributor Edenor and gas transporter TGS, have also announced $40 million and 1.7 billion pesos ($62.44 million) in stock repurchases, respectively.

Filings by the six companies show capital spending increased in the first quarter, which coincided with strong economic growth in Argentina. But filings later in the year would likely show deceleration in investment, said Fernando Camusso, director of investment firm Rafaela Capital.

“Companies are not suspending previously announced capex, (but) they are not announcing anything new as they wait for the economy to normalize,” said Gustavo Fingeret, head of equity research for Argentina and the Andean region at Bradesco, a Brazilian bank.

Second quarter earnings have not yet been released, but there are signs overall investment is slowing down: imports of capital goods, which expanded 23 percent in 2017, fell 5.6 percent in May and 16.9 percent in June, government data shows.

Buybacks are more common in markets like the United States, where critics say they reduce investment, research and jobs but proponents including many activist investors say they are often the best way of maximizing shareholder value.

CASH PILES

Both Pampa and Sociedad Comercial del Plata, a conglomerate with energy and entertainment holdings that plans to buy back 600 million pesos ($22.04 million) in shares, say larger-than-normal cash piles after recent asset sales made buybacks a logical choice after their share prices fell.

“Who would want to have liquidity stuck in pesos, when its value deteriorates daily?” said Luis Pereiro, tenured professor of international corporate finance at Universidad Torcuato Di Tella in Buenos Aires, adding that companies preferred buybacks to dividends because they are taxed at a lower rate.

Sociedad Comercial del Plata’s chairman, Ignacio Noel, said it set aside 20 percent of its liquidity for buybacks, with the remainder devoted to capital spending or potential acquisitions. He said capital spending would remain steady this year at around $60 million.

Other companies that have announced buyback plans include bank Banco Macro and Cresud, which has farm and real estate holdings. A Banco Macro spokesman noted that the company had not begun executing its 4.5 billion peso ($165.32 million) program yet. A Cresud spokesman declined to comment. (Reporting by Luc Cohen Editing by Christian Plumb and Ross Colvin)

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