Thursday, September 18, 2014

Buying Back Corporate America

Are U.S. corporations pulling up the drawbridge? Finding an alternative to dividends? or Overlevering themselves? 

The Economist argues that share buybacks may be encouraging shorttermism and that by "reducing the number of shares outstanding, buy-back schemes can also artificially boost a firm’s earnings per share.Based on its survey, buyback activity "in the S&P 500 index" reached $500 billion in 2013, "close to the high reached in the bubble year of 2007:" that is a third of U.S. corporate cashflow. Furthermore, the Economist notes that "buy-backs have usurped dividends as the main way listed American firms give money back to their owners, accounting for 60% of cash returns last year.

James McIntosh stresses the levering that buybacks are driving and warns investors, in this September 9th video,  that equity markets may seem calm but the cashflow, and debt raising seem ominously like 2007: the calm before the storm. Mackintosh, the FT's investment editor, charts the close relationship among buybacks, debt raising, and cashflow. Corporate share repurchases have been converting cashflow surpluses into deficits which firms are financing with ever more debt.  The result is more levered balance sheets.

Was Janet Yellen's goal in driving down interest rate to relever corporate balance sheets?


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