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.

Recommended

Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021
Why the world’s most important economic data release has unnerved markets
US Economy

Why the world’s most important economic data release has unnerved markets

The US added only 194,000 jobs in September, far shorter than the 500,000 that were expected. John Stepek explains why markets didn't react as they no…
11 Oct 2021
What is the US “debt ceiling” and what happens if it is not raised?
US Economy

What is the US “debt ceiling” and what happens if it is not raised?

The US government has hit its self-imposed spending limit. Unless that limit is raised, the government will run out of money. Saloni Sardana explains …
30 Sep 2021
The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?
US Economy

The US Federal Reserve is about to rein in its money-printing – what does that mean for markets?

America’s central bank is talking surprisingly tough about tightening monetary policy. And it’s not the only one. John Stepek looks at what it all mea…
23 Sep 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021