SocGen Makes A Striking Discovery: Most Buybacks Were Used To Pay For Stock Options

Frequent readers will recall that it was Andrew Lapthorne's revelation back in late 2015, which was behind the following chart, indicating that virtually all net debt issued this century has gone for one thing: to fund buybacks, i.e. wealth transfers from bondholders to shareholders.

Now, in a follow up note as the increasingly politically-charged topic of record (projected) buybacks...

... which over the past few days has once again made the financial media rounds (WSJ: "Record Buybacks Help Steady Wobbly Market"; Barron's "Why the Buyback Boom Is Bullish for Investors"; ZH: "This Is What The Slow-Motion LBO Of The Stock Market Looks Like"), Lapthorne reminds his readers that "we are anti-buybacks for the simple reason that while the theory is sound, in practice they are hugely inefficient." And as Lapthorne explained last year, "typically it is the weakest not the strongest businesses that buyback", which if accurate raises big question markets about some of the most lauded companies in the S&P500:

Lapthorne is also against buybacks because, as he often notes, "there is also a strong tendency to use debt rather than spare cash, which has led to a dangerous build up in US leverage", and he is right: see the top chart for evidence.

But have buybacks really helped stocks outperform the overall market? As we noted over the weekend, according to WSJ calculations the answer is yes as "of the 20 S&P 500 companies that spent the most on buybacks over the first quarter, nearly three-quarters have outperformed the index so far this year. The group has risen an average of 5.2% in 2018, compared with the S&P 500’s 1.9% gain." Lapthorne is not so sure, and writes that while "much has been made of the surge in repurchases, which leapt 20%+ in the last quarter as companies took advantage of repatriated cash and tax cuts to increase their buyback programs" a more nuanced look reveals something surprising.

Of course, the S&P500 is up over 20% over the last year so 20%+ is just keeping up with market prices, but newswires are still full of glowing articles proclaiming companies that bought back in Q1 outperformed and have helped prop up the equity market. We find differently. When measured as a % of market capitalisation, businesses that buy back the most of their market cap underperformed – albeit not significantly so.

Wait, but if buybacks did not have a direct impact on outstanding shares, what were they used for? And here another stunning revelation by Lapthorne: "it looks like the bulk of last quarter’s repurchases went on stock options (aka wages)."

We recognise that calculating the stock option effect is an educated guess as we look at the amount repurchased versus the actual reduction in the share count and assume the difference is the option issuance effect (though issuance can be for other reasons).

The SocGen strategist's conclusion: "looking at the table below it appears as if buybacks have indeed gone to pay higher wages, but we suspect not in the way policymakers hand in mind."

Well, at least someone is getting rich from Trump tax reform, too bad it's the opposite of the middle class that was supposed to benefit.


J J Pettigrew Mon, 05/14/2018 - 09:10 Permalink

......and the tax cuts for corporations are going to keep prices down (because taxes wont be passed on) and employees will make more wages....

RIGHT AFTER the Executive raises and the stock buy backs that trigger the stock options....

evokanivo Mon, 05/14/2018 - 09:23 Permalink

A quibble with the article:  "typically it is the weakest not the strongest businesses that buyback"

Over the last few easy-money years it *was* debt issuance, but now it's actually less so than before due to the tax changes. Apple for example has a huge overseas cash stack and the tax changes allow them to repatriate the money without paying much in tax. So for many major companies at the moment it's not actually issuance of debt that's funding the debt buybacks. TSLA and others are another story; my point is that share buybacks are no longer as good an indicator of a hollowed-out company. Instead, look at the funding source.

PS: See Wolf Richter's timely analysis of this very topic.

numapepi Mon, 05/14/2018 - 09:25 Permalink

Buybacks are a form of embezzlement. From bond holders and shareholders... to executives.

Executive pay is largely a factor of stock price, so buy backs artificially increase executive remuneration. This at the cost to shareholders since the artificially increased stock price is only an asset once it is sold, until then, if the stock tanks that paper assert becomes a paper liability.

Another form of the principle agent dilemma.

ThanksIwillHav… Mon, 05/14/2018 - 09:27 Permalink

If the tax holiday is an accounting change (i.e. the cash was held mostly in US debt instruments, foreign cash LOL), the companies are selling US debt for $'s to buyback stock.   Who is buying the the increased debt issuance?

johnjkiii Mon, 05/14/2018 - 10:25 Permalink

Of course buybacks cannot reduce shares outstanding unless the shares bought are then retired. They may be held in treasury or "not issued" but they still exist. If they are used for rewards to executives or other employees then they are still outstanding even though they may be illiquid for a time under the provisions of the plan by which they are distributed to employees. Either way, it is a perfidious and supremely inefficient misuse of company funds; limits the firms' flexibility to expand its capital equipment thus limiting revenue growth and, when the market decides to correct, reduces liquidity to the extent of the aforementioned restrictions. What could possibly be or go wrong?

Md4 Mon, 05/14/2018 - 10:54 Permalink

“Lapthorne is not so sure, and writes that while "much has been made of the surge in repurchases, which leapt 20%+ in the last quarter as companies took advantage of repatriated cash and tax cuts to increase their buyback programs" a more nuanced look reveals something surprising.”

These motherfuckers were supposed to use the benefits of the Trump Tax Plan to increase capex, R&D, and ultimately, manufacturing to grow good-paying jobs for what’s left of middle class America.

I’d like to see televised congressional hearings with these corporate sumbitches under hot lights explaining this.

Buybacks to mimic growth, as reflected in increased share price, is cheating.

It is fancy fraud, nothing more...

pitz Mon, 05/14/2018 - 11:26 Permalink

Bondholders are willingly and consensually lining up to fund such.  So I fail to see how it is really a 'transfer of wealth'.  They know the drill.  They have only themselves to blame if wealth is transferred away from them.  

Having said that, not a hope in hell that pensions will ever be solvent given that the environment for pension fund returns has never been better.  Higher rates will put the final nail in the pension coffin.

fiddy pence ha… Mon, 05/14/2018 - 15:12 Permalink

more wealth transfer to the 1%.

wake me up when their heads are

rolling past.


The comeuppance of this will happen

in the next 12 months when these

magnificent corporations. lacking enough

income, cannot pay the interest on their


aaaaaaand kaboom.