Wolf Richter www.wolfstreet.com [13] www.amazon.com/author/wolfrichter [14]
The word “gloomier” inconveniently showed up in a Reuters headline that described how the CEOs of the Business Roundtable – one of the thermometers into the brains of corporate America – felt about sales, employment, and capital expenditures. Yet, “gloomier” or not, these CEOs run companies that have been spending near record amounts, not on productive uses such as capital expenditures or hiring more people to push revenues to the next level, but on buying back their own shares.
The Business Roundtable is an association of CEOs of the largest corporations in the US that account for “more than a third of the total value of the US stock market,” according to its website. On its agenda: lower corporate taxes (tax credits!), more immigration of cheap labor, and trade – the big trade agreements currently being negotiated in all secrecy [my take from late last year, though resistance has grown since.... Coming Soon: Corporate Tools To Hollow Out National Sovereignty [15]].
Or, as it says [16] so eloquently, “working to promote sound public policy and a thriving US economy.”
But the BRT results didn’t speak of a thriving US economy. “CEO plans for investment, hiring and sales over the next six months decreased, with employment plans declining the most,” the survey [17] stated. It wasn’t pretty:
- The least bad was the sales index, which dropped 4.5 points to 116.4, with 20% of the CEOs expecting sales to stagnate and with 7% expecting sales declines.
- Capital expenditures looked worse. They would increase at only 39% of the companies, down from 44% in the prior quarter; they’d stagnate at 51% of the companies, up from 41% in Q2; and they’d get slashed at 10% of the companies, up from 8%. It dragged the cap-ex index down by 6.8 points to 79.1.
- And US employment? Only 34% expected to increase employment in the US, down sharply from 43% in Q2; but 20% would slash payrolls, up from 14% in Q2. And the sub-index plunged 15.7 points to 63.5.
What would it take to reverse the slide? At this point, BRT becomes a lobbying group. “We believe Congress and the Administration must focus on policies that drive economic growth, including tax reform, immigration reform, trade expansion, and long-term fiscal stability,” BRT Chairman and AT&T CEO Randall Stephenson said in the statement, directed straight at Washington.
But what are these CEOs doing instead of hiring and training people and investing in capital expenditures, crucial and sorely missing ingredients in the economy?
Turns out, 740 corporations have authorized share buyback programs through August, the most for this period since 2008, just before the whole construct collapsed. And according to research cited by the Wall Street Journal [18], they spent $338 billion during the first half on buying back shares, the most since 2007.
As overall trading volume is getting more and more anemic, these buybacks make up an ever larger proportion of total trading.
IBM, the second most prolific buyback hero after Apple, spent $8.2 billion to buy back 45.2 million shares during the first quarter, or over 13% of IBM shares traded during that time. It had its reasons; it needed to prop up its stocks as it was wearing investors ragged with its declining revenues. And it worked. Share price during the quarter rose, despite the dark clouds hanging over IBM, by 2.5% while the S&P 500 rose a mere 1.3%.
The buyback program of Illinois Tool Works made up 18% of the volume of its shares in May and 15% in June. In late February and in March, Oplink Communications bought back enough shares to account for over 30% of the trading volume.
And it worked. According to an analysis by Barclays cited by the Wall Street Journal, companies that spent the most on buybacks outperformed the stock market by 20%.
And now we know who has been buying every tiny dip: companies! When their shares head south, “companies get more aggressive,” explained Chip Gibbs, head of the buyback business at Bank of America Merrill Lynch.
In this environment, buybacks have outsized impact on volume, and therefore on price. Companies are blowing real cash on manipulating their own shares. Sure, stockholders might be happy in the short run. But unlike investments in productive assets and in people, the effect of this corporate “relentless bid [19]” fades as soon as the buybacks fade. They’re a vicious treadmill, gobbling up ever larger amounts of real cash as stock prices rise.
A very capital-intensive way of financially engineering EPS, which is what every analyst on Wall Street is genetically programed to look at. But only part of the buybacks end up reducing share count. The rest are used to hide the dilution from executive stock compensation plans and stock-based acquisitions. Buybacks are a way to pull a bag over investors’ heads.
In the end, they accomplish nothing for the company’s operations – nor for the real economy. And when the cheap cash runs out to do these buybacks, a vacuum opens up under those shares, and under the market in general. That’s one of the things that happened in 2008 after all the craziness had peaked.
Oh, and FactSet [20] just released its report on buybacks for Q2: share repurchases plunged 23% from Q1 to $124 billion, the worst such decline since Q4 2011. But it was still a lot of cash, and down only 1.1% year-over-year. Given the surge in past quarters, for the trailing 12 months, buybacks still rose 29% to $539.3 billion. Alas, free cash flow declined 0.5%, and the ratio of buybacks to free cash flow continued to rise, hitting 82%, the highest level since, well, Q3 2008. But this time, of course, it will be different.
At this confluence of excess and exuberance on one side and the spreading sub-surface carnage in smaller stocks on the other side, even venture capital begins to fret. Read… “Excessive Amounts of Capital” Doom Startup Bubble [21]