The era of cheap borrowing is fostering corporate America’s favorite investor-pleasing activity: Share buybacks.
Indeed, more than half of all buybacks are now funded by debt. And while there’s an argument that repurchases benefit share prices and investors, at least in the short run, it’s questionable whether highly indebted companies should be doing this. Sort of like mortaging your house to the hilt, then using it to throw a lavish party.
But once a recession inevitably arrives, the result may not be pretty for companies with lots of leverage, in no small part due to buybacks. With corporate debt now higher than its peak in scary late-2008, Dallas Fed President Robert Kaplan has warned, overly leveraged companies “could amplify the severity of a recession.”