I’ve written before about the popularity of stock buybacks and what a generally rubbish idea they are. Sadly, things are getting worse.
In the US so far this year there have been $320bn worth of share buybacks announced. That’s a pretty big number given that we are not yet half way through the year, and total buybacks in 2012 (a year considered to be “strong” for buybacks, according to Marcus Ashworth of Execution Noble) came to $477bn. If this pace keeps up we will see over $800bn worth of buybacks this year so “over $3bn every trading day”, says Ashworth.
This is irritating in itself – as I say here the only people who benefit from buybacks in the end are high level executives with compensation plans linked to the stock price. The rest of us would mostly prefer to see real money in the form of dividend payouts.
But there is more. How do you think that the many company executives making themselves rich via bonuses and buybacks are getting the cash together for the deals? It is our old friend quantitative easing (QE).
As Andrew Lapthorne points out in a recent note for Société Générale, “squeezing investors out of safe US government bonds and into corporate bonds (via low yields) has created a demand for corporate credit that has been met with a wave of supply.”
So the last quarter of 2012 saw almost the largest volume of corporate debt issuance on record. Not all of that went on share buybacks – some went to pay out special dividends in advance of a potential rise in taxes related to the fiscal cliff. But an awful lot has.
So QE has created the opportunity for companies to raise very cheap debt (they effectively end up holding ‘QE cash’. They have used that debt to buy back shares, something that instantly raises earnings per share and any compensation linked to that.
Want to be more cross? Easy. Lapthorne reckons that around 40% of repurchases have been done to counter option dilution: the buybacks do little more than pay for employee compensation programmes.
The other point to bear in mind on all this is that while the buybacks do counter dilution from options to a degree, we are still seeing a steady decline in the volume of shares listed on the US stock exchange (down by 13.5% in the last two years, according to estimates from Eoin Tracey at Fuller Money) – something that is no doubt one of the contributors to its seemingly endless rise.
All things to add to the long list of ways in which QE works to raise asset prices and to transfer money from one group of people to another. No wonder, as Lapthorne points out, that even the Bank of England has admitted that “QE mainly benefits the rich”.