We’ve reluctantly plunged back into the increasingly contentious buyback debate over the past week.
I say “reluctantly” because at this juncture, this discussion is about as polarized as American politics, which I suppose is only fitting considering share repurchases have become a highly politicized debate.
Already incessant financial media coverage (and really, coverage by media outlets that aren’t market-focused as well) has seemingly kicked up a notch over the past couple of weeks, so it isn’t surprising that SocGen’s Andrew Lapthorne, buyback crusader extraordinaire, was out weighing in on Monday.
While perusing our archive to determine when we last covered Lapthorne’s buyback criticism, we stumbled across the following passages, which we’ll just reprint here for anyone who needs a refresher. To wit, from an August post:
Iâ€™d be willing to go out on a limb and say that when it comes to criticizing financial engineering gone wild in an era of easy money, Lapthorne is the most outspoken critic on the Street. Heâ€™s been railing against the folly inherent in leveraging the balance sheet in the pursuit of ill-timed buybacks for as long as I can remember and this is perhaps my favorite quote from him on that front:
As we have long pointed out, the reason for [the] increase in debt is largely down to financial engineering â€“ aka share buybacks. Borrowing money to buy back your elevated shares is clearly nonsense.
Yes, itâ€™s â€œclearly nonsenseâ€, but the problem with being perpetually mad at this particular brand of nonsense is that in a world where artificially suppressed borrowing costs are commingled with investor myopia and commensurate short-sightedness on the part of corporate management teams whose compensation is in some cases equity-linked, everyone involved prefers â€œnonsenseâ€ to balance sheet discipline.
And because the same policies that pushed borrowing costs to levels that encourage financial engineering are helping to prolong the cycle, that lack of balance sheet discipline is the barking dog that never bites.
That neatly encapsulates this whole debate.
On Monday, Lapthorne notes that “press reports on the US corporate debt build-up and share buybacks are very much in prominence [and] one recurring topic is whether debt issuance and share buybacks are connected.”
Obviously, they are – connected that is. But if you ask Andrew, that’s still “far from” the consensus view.
Lapthorne’s Monday notes are short, and this one is no exception, but he makes a couple of good points in the course of describing what he pretty clearly thinks is a misguided approach to conceptualizing the “problem.”
“One possible reason for the confusion is a focus on leverage metrics (e.g. debt to assets) as the principal barometer of credit risk, when in our view what really matters is attaching inappropriate debt to a business that is unable to cope with”, he writes, adding that “a business with 60% leverage where the assets are all US bonds is very much a different credit risk to a business with 60% leverage where all the assets are Bitcoins.”
He also asks whether it makes sense to measure buybacks in simple terms (i.e., the gross dollar amount) or whether one should look at share repurchases relative to the size of the company executing them.
“We measure buybacks in terms of yield, i.e. relative to the market cap of the company and when we look at the evolution of debt-to-asset ratios of these stocks, it is quite clear that the change in this ratio is highest among those companies buying back the most stock.”
The takeaway for Lapthorne, then, is captured in the sub-header of his latest missive.
“Yes”, he writes, “buybacks have led to companies increasing their debt load.”