Courtesy of Pam Martens.
Maybe we’re thinking about today’s stock market all wrong. As the largest corporations in America take on more and more debt to buy back their own shares and boost dividends to dress up their earnings and attract more investors, the stock market is looking more and more like a bond market in drag as equity. Bonds are backed by debt of the company; common stock represents equity in the business operations. But the business operations are now taking a backseat to the binge of stock buybacks.
Jody Lurie, a credit analyst at Janney Montgomery Scott was quoted at Bloomberg News this week with this observation on the buyback phenomenon: “Companies have said, ‘We don’t have an ability to grow organically, so we can distract shareholders instead. When they buy back shares, all it does is optically make earnings per share look better.”
The media frenzy this week over buybacks was fueled by a research note released by Goldman Sachs which likened today’s buybacks at high market multiples to the bad investment decisions on buybacks that corporate CFOs made just before the market crashed in 2008. Goldman noted in its research release that:
“Exhibiting poor market timing, buybacks peaked in 2007 (34% of cash spent) and troughed in 2009 (13%). Firms should focus on M&A [mergers and acquisitions] rather than pursue buybacks at a time when P/E [price to earnings] multiples are so high.”
In September of last year, the Harvard Business Review published its own study on buybacks titled “Profits Without Prosperity.” The findings are outlined as follows:
“Corporate profitability is not translating into widespread economic prosperity. Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. The allocation of corporate profits to stock buybacks deserves much of the blame.”
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