The Last Time This Happened, The Bull Market Ended

In a somewhat stunning reality check for the new normal, companies in the S&P 500 have started paying out more money to shareholders than they produce in operating earnings. The last time spending on buybacks-plus-dividends exceeded operating profit was Q2 2007... that did not end well...



As Bloomberg reports,

S&P 500 companies spent $144.1 billion on share repurchases and paid out $93.6 billion of dividends. The total equaled 104.1 percent of profit, up from 95.1 percent in last year’s fourth quarter.


The increase reflects a reliance on repurchases to spur earnings-per-share growth, according to Howard Silverblatt, a New York-based senior index analyst at S&P Dow Jones.


“They’re getting a lot more pressure to do buybacks,” Silverblatt said yesterday in an interview. “It’s almost an entitlement program from an investor standpoint.” Repurchases will probably stay at current levels through year-end as many companies buy shares to offset expiring options, he added.

*  *  *

With the marginal cost of capital on the rise, however, one wonders just how long compensation-desparate CEOs are forced to admit that the short-term benefits of debt-funded buybacks are outweighed by the medium-term releveraging (which is at record highs) and cash flow crush that ensues.