The ASX 200 (INDEXASX: XJO) continues to see share prices go lower, though today could see a bit of a rally with investors looking for a bargain.
Most of the time there isn't much that management of a business can do to influence the share price. They should aim to sustainably grow profit, which is good for the long-term. They should look to return profits to shareholders if they don't have a better use for the cash by investing in the business, or perhaps using the cash for an acquisition.
A lot of businesses pay their dividends on a set schedule, either half-yearly or quarterly. It's unlikely that businesses will be declaring special dividends during this time.
But buybacks could be a great way for businesses to react.
Why buybacks make sense
Share buybacks give business leadership the opportunity to purchase shares, essentially the business is able support the share price.
Share markets are regularly priced as though everything is going great or everything is terrible. The underlying fundamentals of a business normally don't swing between these extremes. It would make a lot of sense for businesses to use excess cash to buy shares at these lower prices.
Sadly, Qantas Airways Limited (ASX: QAN) has decided to cancel its buyback, but I think it makes sense as air traffic is being heavily hit, so Qantas may not have much "excess cash" before this is finished.
What's actually happening
According to reporting by The Wall Street Journal, businesses in the US are actually pulling back on their share buybacks. When faced with much cheaper prices management are actually deciding to buy less not more shares. This means there is less support for share prices.
It's quite amazing that management don't think like an investor when it comes to things like this. They are not expected to be a portfolio manager, yet they're entrusted to spend millions, or billions, on buying back their own shares at whatever price they decide. The same could be said about the price they're willing to spend on acquisitions.
Businesses could easily step in to provide support for their shareholders if they have the flexibility to do so. Sadly, most businesses don't maintain a strong balance sheet even when times are good.
I think some of the best opportunities today could be the businesses with strong balance sheets that are clearly going to survive through this period, even if there's a recession.
