Monday, March 12, 2007

Stock Buy-Backs

So...who's been buying stocks? Looking at the Federal Reserve's latest Flow of Funds release it becomes pretty obvious: since 2003 corporations themselves have gone on a debt-financed stock buyback binge.

The chart below shows that net issuance of equities (new issues minus buybacks) by non-farm US corporations has reached a record -$602 billion, a fourteen-fold increase in net corporate buybacks since 2003, financed by a record assumption of $437 billion in new debt. Is it any wonder that S&P 500 bottomed out in 2003 and has been rising since?

Which begs the question: Is this the best use of shareholders' money? Isn't corporate capital best invested in growing the business? Such enormous buybacks signify that - on balance - US managers judge that investing in their own companies' expansion is not attractive. The corollary is that earnings growth will decline and that current P/E's are, therefore, too high.

Unless it all has to do 100% with pushing up stock option values? I'm not that cynical...

1 comment:

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