Beating Dead Horses And Weaning Buybacks Off ‘Steroids’

I’m torn over whether it makes sense to keep pounding my head against the wall (or my fist against the bloated side of a dead horse) expounding on buybacks, a political lightning rod that became even more conductive following the Trump tax cuts.

Penning breathless missives about the impact of buybacks on equities long ago lost its novelty. It used to be that cynical bloggers could generate 50,000 clicks simply by paraphrasing themselves and otherwise rewriting the same post about buybacks being responsible for buoyant equity prices. When you throw in the fact that post-crisis monetary policy has incentivized debt issuance, the proceeds from which can then be plowed into share repurchases, you end up with a conspiracy theory that’s mostly true – those are the “best” kinds of conspiracy theories.

But that angle is so passé. Now, it’s all about taking a side in the battle between Democrats (some of whom have floated getting rid of buybacks altogether) and defenders of capital’s inherent right to distribute “spare” cash to enrich itself.

This debate is like any other debate that pits progressives against capitalists, in that you don’t actually have to be capital to pretend like you benefit from capitalism. And that’s a good thing, because most people aren’t capital, they’re labor – even if they don’t realize it.

Why would anyone who doesn’t benefit from capitalism (in this context, that would mean the majority of Americans who, by virtue of not owning much in the way of stocks, don’t actually benefit from buybacks) argue in favor of something like an unchecked propensity for corporations to eschew capex and wage hikes in favor of returning cash to shareholders? Well, it’s all about ‘Murican “values”! There’s something inherently nauseating about the word “socialism”, an ideology which, in addition to demanding a debate about wealth redistribution, is also anti-bald eagles, pro-hyperinflation and in 99% of the places it’s tried, produces results on par with Venezuela. Everyone knows that, ok? Those are the facts.

I jest – sort of. In order to avoid lapsing back into overt sarcasm, I’ll just say that the buyback discussion has become hopelessly politicized, a point I’ve made in these pages on multiple occasions over the past several months. Neither side is being completely honest with itself (buybacks are not the scourge of humanity as some Democrats claim, but anybody who pretends not to understand the basic underlying premise of the various criticisms lobbed at share repurchases is either being deliberately obtuse or else has a vested interest in preserving the status quo – and you can take “vested” figuratively and literally there).

Caught in the middle is the unassuming public, the vast majority of whom don’t have a clue one way or another, but rather parrot whatever line is consistent with their party affiliation. That can lead to absurd outcomes like the one described above, where newly-minted, Trumpian “Republicans” are made to believe that policies which are literally designed to exacerbate inequality are worth defending simply because they are “American”, where “American” is conceptualized as being synonymous with capitalism.

Read more on the buyback debate

‘You Can Make A Reincarnated Steve Jobs The Next CEO’, And Other Highlights From Goldman’s Buyback Chat With Aswath Damodaran

All of that to say what, exactly?

Well, amusingly, all of that to highlight some very simple factoids as delineated by BofAML in the “Buybacks on Steroids” section of a longer strategy update piece.

If you know anything about the actual market debate behind the larger buyback discussion, you know that depending on how you slice the data and spin things, you can pretty much paint any picture you want. That’s not to suggest that some analysis is more “honest” than any other, it’s just to say that smart people can disagree on what everyone should be looking at. Goldman’s David Kostin, for instance, has recently spent quite a bit of time dispelling what he thinks are “popular misperceptions”, while SocGen’s Andrew Lapthorne has generally stuck to the script over the years, which entails persistently reminding everyone that no matter how you look at things, financial engineering in just that: Financial engineering.

But let’s step out of the weeds and look at a few simple stats.

BofAML uses Russell 3000 members (excluding Financials, Real Estate and Utilities) and notes that “since 2013, EPS growth for this sample was 45% (8%/yr), with gross buybacks contributing 12ppt (2ppt/yr) — or roughly 30% of the EPS growth over this period”.


Buybacks, the bank continues, represented ~3% of market cap per year and totaled >$2.7 trillion (>$550 billion/yr).

What’s happened to net debt over that same period for the same sample? Well, as the bank goes on to remind you, “the net debt for this universe nearly doubled (+$1.6 trillion to $3.4 trillion), while total debt has grown by $2.5 trillion.” Here’s a bit of additional color from the bank:

Following years of releveraging activities, the cumulative numbers behind them are very impressive. Since 2013, US corporations executed $2.7trln in gross buybacks, coupled with $3.3trln in dividends paid for a combined total of $5.6trln in shareholder payments. On the other side of this, US IG market has grown by $2trln and US leveraged finance debt by another $540bn. For some perspective, the Fed’s flow of funds report shows $9.6trln in combined capex since 2013. In other words, share buybacks and dividends amounted to 58% of total capex budgets over the last five years, with roughly half of those equity repayments financed with net new debt.

The irony in all of this is that when it comes to who will ultimately decide whether or not corporate management teams continue to splurge on buybacks, it won’t be politicians or voters pushing the party line.

Rather, it will be market participants, because unless everyone has lost their minds completely (which is possible), there will come a point when investors realize that no matter how nice it is when management insists on returning cash to shareholders, some deleveraging is in order before the cycle turns.

With that in mind, it’s worth mentioning that in the latest edition of BofAML’s Global Fund Manager survey, the % of respondents who want corporates to delever stood at 43%. Although that was down 3ppt from March, it’s still near the highest since 2009.


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