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One Trader Takes A Closer Look At The Buyback Bonanza
By Kevin Muir of “The Macro Tourist” fame; reposted here with permission
You had to know that last week’s Barron’s cover was too good for me to pass up. Come’ on. It’s just screaming at me to write a post.
It’s like Lindsay Lohan attending a celebrity vodka launch event - you know no good will come of it, but it will be entertaining, and most likely Lindsay (and myself) will end up making fools of ourselves.
So here I go.
Barron’s covers are by no means the be-all-and-end
I, too, have a list of my favorite Austrian portfolio managers. I wonder how ours compare…
The conclusion does not follow-on from the thread of the article . It is the quantum of $s (esp relative to earnings) that is creating the risk (scariness), not the % of market cap. The low % merely shows what poor value buybacks now represent. And given earnings have not grown in sync with value (i.e. multiples have risen), earnings are less supportive of the buyback funding. The final chart is indicative of risk being further baked into the system and at a faster rate, not that buybacks have become less scary.
Thank you for the article – a good and timely discussion.
Agree. Enormous amount of capital being thrown at record high multiples. For example google in 2008 was around 350 per share. Google today around 1000 a share. Therefore every dollar of capital being expended by google today for buybacks relative to 2008 buys 70% less of google. When you look at the billions being used today relative to then, we are not looking at a lot of support. This appears almost “exhaustive” in many ways.
Why? Was there double the money to throw at buybacks in 2007?
While it may seem comforting to compare buyback volume to market cap, companies can’t pay bills with market cap. That’s not their money. Between the debt added to pay for the buybacks and the subsequent removal of equity from firm balance sheets some very awkward capital structures are being created: CP net worth negative for last three years, Kimberly Clark NW negative two of last three years and barely positive in the other year. The list goes on. Many companies have wrecked their capital structures to artificially inflate EPS. The total of dollar buybacks from 2005 thru 2018 (est) is over $6.5 trillion! As investors, are we really expected to believe that this is the best idea these companies have for our money?