"Our policies must be working, stocks keep going up, Wall St approves!"- the Fed
REALITY: Company debt soared for buybacks, not INVSTmnt; Glbl debt soared (=320% Dbt2GDP☠️); Central banks have "LBO'd" world w/ cheap debt🤔🤦♀️@RobSKaplan @marydalyecon @RaphaelBostic @neelkashkari t.co/nqt7IXWYRX
— M/I_Investments (@MI_Investments) October 15, 2019
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.
Borrowing oodles of money to buy back shares at the end of an economic cycle, when share prices are near record highs, may seem especially dubious for highly indebted companies like AT&T and American Airlines. Buybacks per se are not inherently wrong-headed, wrote RIA Advisors Chief Investment Strategist Lance Roberts on the Seeking Alpha site, but “when they are coupled with accounting gimmicks and massive levels of debt to fund them … they become problematic.”
Lower interest rates have been a big catalyst for buybacks for years, and further rate reductions can only fuel companies’ urge to gather in even more shares. The Federal Reserve last month decreased its benchmark for short-term rates by a quarter percentage point, and futures markets expect at least two more reductions in 2019. The 10-year U.S. Treasury note, which calls the tune for long-term corporate bonds, yields 1.59% annually, half of what it was last November.
Disturbingly, companies are channeling more cash to investors than they are producing in free cash flow, the first time that has occurred since the Great Recession, according to Goldman Sachs. “Unless earnings growth accelerates materially, companies will likely continue to fund spending by drawing down cash balances and increasing leverage,” wrote David Kostin, Goldman’s chief U.S. strategist, in a note to clients.