US buyback binge is on borrowed time

Using debt to return cash to shareholders has never been more popular in America.

Using debt to return cash to shareholders has never been more popular in America, says Bloomberg. In the past three months, 65 S&P 500 firms that issued bonds said that they would spend some of the proceeds on share buybacks or dividends.

Around 70% of those who mentioned buybacks or dividends opted for the former. In the first five months of 2015 more than $460bn of share repurchases were announced. At this rate, last year's buyback record could be eclipsed.

Record low interest rates and the fact that interest on debt is tax-deductible have encouraged companies to borrow money to buy their own stock, thus driving up the stock price and earnings per share. But this looks like the last hurrah for this tactic. "Companies know the Fed is winding down easy money so a lot are running to the gates using debt to fund repurchase programmes," says Rob Leiphart of Birinyi Associates.

The outlook is clouding over; as stocks become more expensive, and corporate bond yields creep higher, "the maths is shifting", says Randall Forsyth in Barron's. Yields on BBB-rated bonds the lowest investment-grade rating have crept up to their highest level in almost 18 months.

This is not good news for stocks, as "buybacks have become part of the market support system", says Howard Silverblatt of S&P Dow Jones Indices.A fifth of S&P 500 firms have bought back enough stock to boost earnings per share by 4% year-on-year. American indices, concludes Forsyth, may not "hover around historic highs" for much longer.

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