The rapidly aging earnings cycle is perhaps best illustrated by an economy nearing full employment with corporate profit margins near record highs. If you are tempted to back these restrictions, because you believe they are well intentioned, it is worth remembering that history is full of well intentioned legislation delivering perverse results. The lower returns on investments has led to more cash being returned, and the fear of earnings volatility has tilted companies away from dividends, which are viewed as more difficult to back out of, to buybacks. In conjunction, a shift from an Industrial Age economy to the economies of today has meant that our biggest businesses are less capital intensive and more dependent on investments in intangible assets, a trend that accounting has not been able to keep up with. Also, the data suggests that these bad players are more the exception than the rule, and banning all buybacks or writing in restrictions on buybacks for all companies strikes me as overkill, especially since the promised benefits of higher capital investment and wages are likely to be illusory or transitory. Forcing these companies to reinvest their earnings, rather than letting them pay it out, will only put more more money into bad businesses and create what I call « walking dead » companies, tying up capital that could be used more productively, if it were paid out to shareholders, who then can find better businesses to invest in.
You can ban or restrict buybacks, but that will not make investment projects more lucrative and earnings more predictable, and it certainly is not going to create a new industrial age. Good luck finding the right the boutique investment for you! On the investment front, it is true that companies that used to buy back large numbers of their own shares will now have more cash to invest, but in what? The narrative about stock buybacks that its detractors tell is that US companies have borrowed money and used that debt to fund buybacks, creating, at least in the narrative, sky-high debt ratios and rising default risk. As with the growth data, you can view this as evidence of either short-term thinking or worse, but note that the second and third quintiles together account for 61% of overall market capitalization, suggesting that if buybacks are skewing debt upwards at some firms, it is more at the margins than at the center of the market. In a world where people complain about how the FANG stocks are taking over the world, you would be playing into their hands, by handcuffing their brick and mortar competitors, with buyback legislation.
I will not dismiss this complaint, but I will come back to it later in this post, since I do think it is playing an outsized role in this process. There are clearly some firms that are buying back stock, when they clearly should not be, paying out cash that could be better used on paying down debt, especially in the aftermath of the reduction of tax benefits of debt, or taking investments that can generate returns that exceed their hurdle rates. The reasons for this difference are simple. Hi Gordon, I often wondered if there was a difference between beef stock and beef broth, so thank you for clearing this up for me! While there is a tenuous link of Fed Funds rate to short term market interest rates, that link becomes much weaker when we look at long term rates and their derivatives. Does China need HK to raise funds? It is possible that tying buybacks to employee wages, as Senators Schumer and Sanders propose, will cause some companies to raise wages for existing employees, but with what consequences?