It was almost a year ago when we noted that [5] 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.
[6]
As predicted, IBM's buybacks subsequently slowed to a trickle [7]...
[8]
...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 [9]" 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 [10] 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!
[11]
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."
[12]
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.
[13]
