The founder of Starbucks (SBUX:NASDAQ), Howard Schultz has returned as CEO, with the coffeehouse colossus seeking a permanent replacement for departing chief Kevin Johnson.

And in a move that surprised Wall Street, he has immediately suspended billions of dollars in share buybacks to free up cash to invest in employees and stores whilst trying to fend off US trade unions.

Buybacks don’t guarantee positive share price performance, as Starbucks’ 25% year-to-date drop demonstrates, and Schultz is keen to prioritise spending on cafes and staff to drive long term growth and ensure Starbucks stays competitive. 

There’s a lesson in this for corporate leaders in the UK, where nearly £33 billion of buybacks have already been announced by FTSE 100 firms so far in 2022 according to AJ Bell’s first ‘Buyback Bulletin’, leaving them on course to break 2018’s record £34.9 billion. On a sector basis financials are currently the largest generator of FTSE buybacks in 2022, followed by oil & gas then consumer staples.

Management’s willingness to purchase stock will be seen by bulls as further support for their argument that UK shares are cheap. Yet as AJ Bell’s investment director Russ Mould points out, history shows companies have a habit of buying stock back during bull markets (when their stocks tend to be more expensive) and not doing so during bear ones (when their stock tends to be much cheaper).

Buybacks disappeared when stocks were at their cheapest (2009, 2020) and proliferated near market tops (2006, 2018) when stocks were at their most expensive.

Without satisfied customers, there will be no business at all, a risk Starbucks’ Schultz clearly recognises, so the would-be investor must ensure that the firm is spending enough on research, product development, capital investment and marketing before it gives away any cash.

There is also the risk that firms buy back stock using debt, potentially weakening their balance sheets and competitive position.

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell.

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