The Q1 Results Are In And... Spending On Share Buybacks Hits All Time High

In addition to being one the best quarter for corporate earnings growth since 2011 due to Trump's corporate tax cuts and fiscal stimulus, Q1 earnings season was closely watched for another key reason - to see what companies are doing with the excess cash "unlocked" thanks to Trump's repatriation holiday: would companies spend it on capex and growth, or would they continue to splurge on buybacks, dividends and other shareholder friendly actions instead?

Now, thanks to Bank of America's credit team which has combed through Q1 public filings, we have an answer, and there is no contest: if Trump had indeed hoped that his tax reform would boost capex more than buybacks, then it has indeed been a failure. As BofA reports, amid high grade non-financial issuers of debt, share buybacks reached the highest level on record during 1Q (ex. Energy, Metals, Utilities) as companies spent repatriated foreign cash.

To be fair, investment in capex did increase, although at half the rate as buybacks, while spending on dividends was stable and spending on acquisitions declined relative to 1Q of last year.

Digging deeper, in Q1 share buybacks among IG issuers rose to an all time high $123BN, up from $82bn in 4Q-17 and $66bn in 3Q-17. The jump in buybacks was driven by companies spending repatriated foreign cash not on capex and higher wages as Trump may have intended (if only in public comments) but on shareholder friendly activity. Furthermore, as BofA adds, 24 high grade issuers with large foreign cash holdings accounted for two-thirds of the total increase in buybacks relative to 4Q.

So what about CapEx? The good news is that spending on long-term growth was $96bn in 1Q, not that much lower than what was spent on Capex. The not so good news is that while capex spending was up from $79bn in 1Q-2017 - a far more modest increase than CapEx - it was down from $103bn in 4Q. Overall the YoY increase in capex spending was 21% (on an issuer-matched basis). The 24 issuers with large holding of foreign cash accounted for over half of the increase in terms of dollars, and capex spending for that group jumped 57% YoY. This suggests that some foreign cash was also invested organically, even if the bulk was returned it to shareholders via buybacks.

The two other corporate uses of cash, spending on acquisitions and dividends, saw recent trends extend, and were thus not impact by Trump's fiscal reform; Spending on M&A specifically continued to decline in 1Q, falling to $54bn from $64bn in 4Q-17 and the recent peak of $85bn in 4Q-2017. This reflects a relatively low pipeline of M&A deals with funding needs late last year. Finally, spending on dividends actually declined $74bn in 1Q from $78bn in 4Q (Figure 8). However, dividend payouts were up 4% on a YoY basis.

Then again, none of this should be a surprise: recall that last November, Gary Cohn explicitly asked corporate managers what they planned on doing with the newly released cash. "If the tax reform bill goes through, do you plan to increase investment — your company's investment, capital investment?" He asked for a show of hands. Alas, as the camera revealed, virtually nobody raised their hand.

Responding to this "unexpected" lack of enthusiasm to invest in growth, Cohn had one question: "Why aren't the other hands up?"

We now know why.

Finally, buybacks and capex aside, BofA also looked at overall credit trends in the first quarter and finds that gross leverage for US public non-financial high grade issuers increased to 3.04x in 1Q from 2.98x in 4Q, while net leverage rose to 2.67x from 2.54x. Both gross and net leverage are now the highest on record, which is great as long as rates are near record lows, but will promptly become a recipe for disaster as rates keep rising.


Cognitive Dissonance NemesisteM Tue, 06/05/2018 - 13:19 Permalink

So let me see if I have this correct.

A 'smart' investor buys low and sells high. And a 'smart' company buys high with borrowed money and then...what?

Oh wait, I know. Flush the stock market, then take all the losses in one year including all that shit they've been burying for years and bank those tax losses to offset future 'profits', then reissue new/additional stock to 'recapitalize' the company and start the ball rolling.

I guess they are smart after all.

<Don't forget to reprice all those executive suite stock options so the top slime will be properly incentivized to start the Ponzi all over again.>


In reply to by NemesisteM

boostedhorse Tue, 06/05/2018 - 13:10 Permalink

Just back from a vacation and I must say it was hilarious to read the ZH doom-porn during it. "Europe exploding", "this is the end" etc, thanks for the laugh.

shortonoil Tue, 06/05/2018 - 13:13 Permalink

The returns on CapEx are now more often negative than positive. So why don't you print some more money for the guy on the street. Hookers and Blow are as good an investment as factories and plants. Let's just put it all into real estate and everyone can live in a tent, because they won't be able to afford the rent. This is getting stupider by the day.

Pollygotacracker Tue, 06/05/2018 - 13:13 Permalink

You know beyond a shadow of a doubt that the economy is in trouble. Companies absolutely will not invest in their companies or employees. Share buy backs at all time highs. Way to go corporate ding a lings! SAD!

Number 9 Tue, 06/05/2018 - 13:14 Permalink

how about giving me an interest free (((loan))) of say 100 billion and lets see if i can make any (((money))) by throwing this shit at the wall and see if any sticks?

we my friends have been hijacked by the money changers and now they are coming in for the kill.. It is not about the money, it is all about the reckoning and we goyim are not falling to our knees and worshiping these beasts quickly enough. 

Lie_Detector Tue, 06/05/2018 - 13:14 Permalink

What happens when they have sell shares at a lower price to raise capital to pay the debt? The executives do not care. They get their payment up front for doing a "great" job of running the business and causing the share price to rise. Oh, that is totally false. They manipulate the price so they get theirs (they care nothing about the shareholders, employee's nor for the health of the American economy). They are among the greediest humans on the planet. They have a "legal" loophole by manipulating the share price to cash in themselves. Too bad there was not a law against this. There should be a massive penalty for companies who borrow to by back shares.   

AynRandObjectivist Tue, 06/05/2018 - 13:16 Permalink

Trump had to know what would happen. The companies manipulate their EPS with buybacks and reward themselves with massive bonuses by hitting or exceeding EPS expectations. Financialization 101. 

small axe Tue, 06/05/2018 - 13:19 Permalink

the owners have always wanted more for them and less for you, but this time it does seem like they have a decent shot at owning it all.

Thanks, Ben and Janet and Jerome...quite the legacy you left our world.

truthalwayswinsout Tue, 06/05/2018 - 13:23 Permalink

One of Trump's biggest mistakes. The biggest without a doubt was not indicting Hillary.

All they had to do with the tax bill was give the breaks for all goods manufactured in the US. That would have brought home all the factories from China and even if they were built fully automated, they would would have created 5 million jobs. 

It would have also deposed the Chinese Communists from power.

Money_for_Nothing Tue, 06/05/2018 - 13:31 Permalink

No money left behind. Buyback cash is invested or consumed. If invested then usually in a company with potential. Trump tax cuts are working. Stale companies are coughing up money better used elsewhere.