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After Viacom's "Shocker", These Companies Are Most At Risk Of Early Terminating Their Stock Buyback Programs

Tyler Durden's picture




 

It was almost a year ago when we noted that as a result of its net leverage surging to levels that had started to threaten its Investment Grade (IG) rating, that it was only a matter of time before IBM would have no more "dry powder" on its balance sheet, or said otherwise, be able to issue more debt and use the proceeds solely for stock buyback purposes.

The culprit for IBM's stock buyback malaise was shown in the following chart which indicated the relentless surge in Big Blue's net leverage.

 

As predicted, IBM's buybacks subsequently slowed to a trickle...

...and the stock has gone only downhill since.

Fast forward to yesterday afternoon, when Viacom revealed that as part of its "Strategic Realignment to Create Efficiencies and Drive Long-Term Growth" it would do something which the market loathes: it would stop its buybacks. Specifically it said that "Viacom will temporarily pause share purchases under its current $20 billion stock repurchase program in order to stay within its target leverage ratio."

What Viacom meant was that just like IBM, its net debt ratio had likewise soared in the past several years, and had reached a level where the Baa2/BBB-rated company was on the verge of being cut to junk status.

It was therefore not surprising that in order to "stay within its target leverage ratio" yet another major stock repurchaser was forced to give its primary share-price boosting strategy an indefinite break.

But is Viacom a harbinger for the broader market, a market which as we reported previously only, had a tremendous month of February only because of a record $100 billion in announced stock buybacks?

The answer is a resounding yes, because IBM and Viacom are not alone.

As Citigroup showed in a recent report, contrary to false and misleading reports of corporate deleveraging, median leverage for both Investment Grade companies and recent fallen angels is the highest it has ever been!

 

As Citi sarcastically notes "if leverage is going up today because it’s funding tomorrow’s growth that might not be a bad thing. Unfortunately, that’s not what’s going on."

In other words, all this record debt issuance is not used to fund capex, but as in the case of IBM and Viacom, is used exclusively for shareholder friendly activities, such as stock buybacks and dividends.

Which means that as soon as the buyback quiet period ends in the first week of May, the next catalyst concerned shareholders will focus on will be which company will follow in Viacom and IBM's footsteps, and likewise announce that in order to preserve their IG rating, will be "forced" to halt stock buybacks for the indefinite future.

To make our readers' lives easier, here is a quick and dirty CapIQ screen looking at the largest S&P companies which have repurchased $2 billion or more in stock in the last 12 months, and whose net debt/EBITDA is dangerously close to the "fallen angel" category. Not surprisingly, the top 20 results feature both IBM and Viacom. Expect many more companies on this list, especially those with higher net leverage, to announce that their stock buybacks are also put on hiatus until further notice, leading to a sudden and sharp air pocket in their stock price.

 

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Tue, 04/07/2015 - 20:06 | 5968684 HedgeAccordingly
HedgeAccordingly's picture

Well when Apple starts pulling back on the Reins.. will be a problem.. a $6.1 billion per quarter $ hole..

http://hedgeaccordingly.com/2015/03/apple-inc-leads-sp-500-in-q4-stock-b...

Tue, 04/07/2015 - 20:27 | 5968763 ZippyBananaPants
ZippyBananaPants's picture

Is this the same kind of 'shocker' as when you are fooling around with a girl and you jam your thumb up her butt without her expecting it?  

Tue, 04/07/2015 - 20:37 | 5968805 FlSapo
FlSapo's picture

I had to log in to thumbs that one up, pun may or may not be intended..

Tue, 04/07/2015 - 20:47 | 5968864 NoDebt
NoDebt's picture

Agreed with FlSapo, that's probably the best comment this thread is ever going to see.  You think you're the adventureous type?  Try that some time without letting the girl know you're going to do it.  Chalk it up to a "learning experience" afterwards.

Tue, 04/07/2015 - 22:31 | 5969325 buzzy_the_pirate_dog
buzzy_the_pirate_dog's picture

Related to "Fish Eye"

Tue, 04/07/2015 - 21:37 | 5969135 Lets Buy The Dip
Lets Buy The Dip's picture

haha. The old thumb in the bum trick ey *says in maxwell smart voice*

I listen to this guy from OZ ==> http://bit.ly/1fMcakI as his calls are very accurate. You cannot be too careful about the morons down there are CNBC, basically telling you to BUY WHEN they are SELLING, and then telling you to SELL when they are BUYING. Dirty bastards they are. 

These stock buy backs will happen. The market is at fair value here, so they will do what they can. Normally you see much more VIOLENT LARGER BUY BACKS when the market is cheap. 

I do not know about you but there is all these people posting all the margin debt charts each year, and still the market goes higher. I expect this to happen for a few years yet, so do not believe people wen they say MARGINS and DEBT cannot go higher, when it has been, and can continue!

Tue, 04/07/2015 - 22:29 | 5969318 stocker84
stocker84's picture

Ya... checked out that site with the guys whose "calls are very accurate" and at first i thought it was just monkey shit... and then I began to realize it isn't.

It's actually monkey shit that's being thrown unto unsuspecting bystanders.

I'd give you the details but that's reserved for VIP schmucks who are stupid enough to pay for spam-scam.

 

 

 

Tue, 04/07/2015 - 22:43 | 5969361 dvfco
dvfco's picture

I hope you are thinking about this from the woman's perspective and, in that case, I wouldn't know.  

Being male, I can only discuss it from an observational point of view and yes, it seems to be a surprising event.

Wait, so that's how these scumballs at Goldman feel when they've pulled a fast one?  Oh, geez, it is fun, but . . . 

Tue, 04/07/2015 - 23:16 | 5969459 chilli sauce
chilli sauce's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Wed, 04/08/2015 - 04:56 | 5969851 Automatic Choke
Automatic Choke's picture

do tell.   sounds great!  such a deal!  Tell you what, send me $100k, Mr(s) chilli sauce, and I'll send you 50% of my earnings forever.  You'll be a zillionaire for sure.  How can you lose? 
<go away, asshole>

 

 

Wed, 04/08/2015 - 08:59 | 5970182 Gold Dog
Gold Dog's picture

What he said.

Tue, 04/07/2015 - 20:08 | 5968690 ebworthen
ebworthen's picture

So people trying to save for "retirment" in the Wall Street casino will see no dividends, then a drop in stock values, then another crash so the insiders and big banks can rake more chips off the green felt.

"Gee, look at my portfolio, I'm doing pretty well!"  Yeah, until it is all devalued by 70% and we enter a lost decade or two, so that when people go to retire it has all been fee'd, crashed, and dashed into almost nothing - and what is left will be taxed at 50% to get to it.

What a friggin' Ponzi!

Tue, 04/07/2015 - 20:16 | 5968729 captainkid
captainkid's picture

not for corp fat cats and congresscritters..... where are the pitchforks?

Tue, 04/07/2015 - 20:11 | 5968710 NoDebt
NoDebt's picture

That tears it.  I'm buying an annuity.

(just kidding)

Tue, 04/07/2015 - 20:25 | 5968754 gmak
gmak's picture

6.1x net debt to EBITDA for Deere? Almost a fallen  angel?  Jeez, what's the ratio for a fallen angel, anyway?

Tue, 04/07/2015 - 20:27 | 5968764 NoDebt
NoDebt's picture

6.2?

Tue, 04/07/2015 - 20:32 | 5968784 ThroxxOfVron
ThroxxOfVron's picture

Now where did I put my Herbalife?

Everybody please stand up and check their seats to make sure they aren't sitting on my Herbalife!

Tue, 04/07/2015 - 20:31 | 5968779 Winston Churchill
Winston Churchill's picture

It used to be illegal for a company to buy its own shares.

Time it was again.

Tue, 04/07/2015 - 20:42 | 5968836 Motorhead
Motorhead's picture

If they didn't do it themselves, they'd find a way-around for someone else to do it.  I hear ya, though.

Wed, 04/08/2015 - 09:02 | 5970192 Gold Dog
Gold Dog's picture

Right-o.....they'd just get that guy in Denmark who is buying all of those Treasurys to throw a couple of hundred billion at the stock market.

Tue, 04/07/2015 - 20:32 | 5968782 Motorhead
Motorhead's picture

Hmmm, and I remember Ralph Acampora saying on financialsense.com a good year ago that IBM was a "double".  Sure, Ralph Malph, sure.

Tue, 04/07/2015 - 20:41 | 5968821 Downtoolong
Downtoolong's picture

The Asset Price Growth = Yield meme suddenly has a limit (aka running into the brick wall).

 

Tue, 04/07/2015 - 20:54 | 5968911 NoDebt
NoDebt's picture

Indeed.

Wed, 04/08/2015 - 13:21 | 5971535 Livermore Legend
Livermore Legend's picture

Any Man who Recognizes AND Acknowledges that one can learn more in a short time of Individual Application than in 25 years of "School and Business" is a Man on The Right Path.

As I have taught My Progeny, "Education" is effectuated by the Individual; Not Organizations.

The Rest = INDOCTRINATION.

"Epictetus maintains that the foundation of all philosophy is self-knowledge, that is, the conviction of our ignorance and gullibility ought to be the first subject of our study......."

IGNORANCE is a Choice made by Individuals, Not Governments.

Tue, 04/07/2015 - 20:56 | 5968922 goldman58
goldman58's picture

so when will the other shoe drop

all the signs pointt o a dismal eonomy

 

Tue, 04/07/2015 - 21:59 | 5969216 q99x2
q99x2's picture

Leave it up to Yellen. She take care of it.

Tue, 04/07/2015 - 22:02 | 5969228 falga
falga's picture

Stock buy back simply means that management feels that their core business has run out of steam and that the management has run out of alternative ideas to generate adequate returns for shareholders.  

Stock buy-back = Management bankruptcy 

solution: change the management and cut all EPS related bonus to same...

Tue, 04/07/2015 - 22:17 | 5969279 El Hosel
El Hosel's picture

  "junk status".... The meat has been loafing

Tue, 04/07/2015 - 22:18 | 5969285 bahaar
bahaar's picture

Stock buybacks are supposed to mean : my business is going to grow so much in future my stocks right now ar so.oo cheap.

Tue, 04/07/2015 - 23:48 | 5969568 northern vigor
northern vigor's picture

" my business will grow so much my stocks are so.oo cheap"...yeah that's  what the original reason was to buy back shares.

Not ...interest rates are so.oo cheap I'll buy back stocks to make my worthless shitty company look good.

I think some kid in the backroom of Viacom told the CEO as he was emptying garbage cans..." So.oo if you wait a few months until the market crashes, those Viacom shares will be cheap as shit".

Wed, 04/08/2015 - 01:52 | 5969728 HonestlyExpress...
HonestlyExpressingYourself's picture

I feel like all us bears are a broken record - sure there's possible catalysts to end the bubble everywhere you look, but then we've been seeing this for at least 12-18 months. It's painful at the top as the days grind by and markets levitate as happly as ever.

Wed, 04/08/2015 - 02:11 | 5969739 thamnosma
thamnosma's picture

They really seem to have hit a plateau however. Where has the Dow gone over the last few month? A basically flat trend. A waiting period.

Wed, 04/08/2015 - 04:58 | 5969852 Automatic Choke
Automatic Choke's picture

we may sound like a broken record, but basically we have our noses pressed against reality. 

stock buybacks falling apart.

QE diminishing.

the shit will hit the fan sooner or later.....keep stacking, folks, and be very very patient.

 

 

Wed, 04/08/2015 - 06:42 | 5969908 matagorda
matagorda's picture

A company with a $27b market cap and a $20b buyback program?  Like the Cheshire Cat... all that was left was the smile.  Buyback supported by the market cap, which is supported by the buyback, whiich...

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