Salient to Investors:
Share buybacks are now the preferred way to boost stock prices in the face of softening earnings. Quarterly spending on dividends has risen 80% and capital-expenditure budgets have risen 44% since early 2009, whereas spending on buybacks has risen nearly 5 times . In Q1 2015, SPX companies returned more money to shareholders than they earned, the first time since Q4, 2008.
Executives’ reliance on share-count reduction has been fueled by the growth of stock-based compensation making companies buy back shares to prevent dilution.
Howard Silverblatt at S&P Dow Jones Indices said:
- This is not a normal trend but a new addiction replacing QE.
- S&P 500 companies have spent $2.41 trillion on buybacks in this bull market vs. a $2.37 trillion rise in the Fed’s balance sheet since the start of QE.
- 12% of S&P 500 companies are on track to reduce shares by 4% or more versus a year ago and this will grow to 20% of the S&P 500 by the end of the quarter.
- Total buybacks and dividends assumed reinvested account for 35% of the rise in market cap for the S&P 500 since the bottom in 2009; excluding dividends, 21%.
William Lazonick at the University of Massachusetts Lowell said:
- Substantial buybacks are a symptom of a lack of innovation in dominant companies and if a company cannot continue generating revenue and profit it becomes a problem
- If a company is spending more than 50% of profits on shareholder returns, it is not investing in its future but short-changing middle-class workers of jobs to benefit hedge-fund managers and corporate executives.
- The big problem is the power of Wall Street to take this money out of companies.
Savita Subramanian at Bank of America Merrill Lynch said:
- The share buyback frenzy comes down to executives not finding better options for growth and being afraid to commit to hiking dividends.
- Buybacks make sense if valuations are depressed, but this is no longer true for most SPX companies.
- Buybacks are not boosting share prices the way they used to, while companies that have invested in capital spending or M&A are posting stronger performances of late.
Read the full article at http://www.marketwatch.com/story/how-stock-buybacks-have-become-wall-streets-new-drug-2015-07-17
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