Monday, July 6, 2015



The chart below, courtesy of Goldman Sachs, shows that stock buybacks as a percent of total cash use has reached the highest level since 2007.


Of course, it is not just the overall increase in stock buybacks that is concerning, but the surge in buyback announcements. The rush to market suggests a near "panic" by companies to take advantage of both low rates and investor appetites. 

The chart below, courtesy of Deutsche Bank, should elicit some concern.

The problem for investors is that inorganic measures to boost profitability, like cost-cutting, wage suppression, layoffs, and stock buybacks, are finite in nature. Eventually, these options are exhausted.  There are only so many employees that can be terminated, wages can only be suppressed for so long, and there is a finite number of shares that can ultimately be repurchased from shareholders.

The question that investors need to be asking is what happens when companies inevitabilty reach "the end of road." Importantly, with the Fed determined to begin hiking interest rates, despite weak economic data, the end may be nearer than most are currently expecting.

No comments:

Post a Comment