The past year's stock rally is a classic case of newly-created money bidding up asset prices. Now, thanks to the researchers at Trim Tabs, we know more about one of the ways this has been accomplished -- and about why it might end.
As Corporations Boost Share Buybacks, Insiders Stand Back
U.S. companies are buying back stock at a blistering pace this year, but the executives who run the companies aren't increasing their own personal stakes.
There has been $264 billion of disclosed buyback plans so far this year, compared to only $3.3 billion in insider purchases within those companies, according to data released this week by TrimTabs Investment Research. The disparity between both indicators is the lowest since 2004, and highlights some concerns on Wall Street that stock prices are still too lofty.
Analysts say the lack of any insider stock buying at companies like Wal-Mart Stores Inc. (WMT), Intel Corp. (INTC) and Walt Disney Co. (DIS) shows top executives don't appear to be confident about their stock's fortunes so far this year. Yet, these companies are all among the top 30 biggest stock-buyback programs in the country.
"This is a warning," said Charles Biderman, chief executive of TrimTabs. "If you were to compare the stock market to a casino, the house is the people who run public companies. Historically, they have been more accurate than anyone else."
Biderman has developed a ratio to determine market confidence by comparing insider activity and announced buybacks. The ratio, which divides the total amount of announced buybacks with insider purchases, currently stands at 80. Higher levels mean insiders aren't investing at the same pace as their companies initiate buyback plans.
The latest number is the highest since TrimTabs began tracking the data seven years ago. By comparison, the ratio between announced buybacks and insider buying was only 15 in the first quarter of 2009, when the stock market bottomed following the financial crisis. The ratio hit 46 in 2010 and now has widened to what Biderman considers is an extreme level.
The data are worrisome as Wall Street wrestles with a slowing economy, with analysts and economists debating whether the recovery has either hit a temporary slow patch or faces a more prolonged slowdown.
The Dow Jones Industrial Average has wobbled in recent weeks after hitting a three-year high in late April. A series of weak economic readings have prompted concerns about how upcoming earnings reports will play out. Some fear slowing manufacturing, stubbornly high unemployment and low consumer sentiment will weigh on corporate profits as the earnings season approaches.
At the 30 U.S. companies with the biggest buyback programs, insider buying occurred at only six of them, according to TrimTabs. The top executives at these companies snapped up about $10 million, a tiny amount compared to the billions of dollars in overall insider buying so far this year.
"Any time you see on a company level that kind of conflict, it should raise some eyebrows," said Ben Silverman, director of research at InsiderScore.com. "It's a concern because you want that alignment between what management is doing and what the company's doing."
To be sure, some analysts said this particular ratio isn't the best representation for insider buying trends. Jonathan Moreland, director of research at InsiderInsights.com, said there's typically more open market purchasing activity among corporate insiders at small- and mid-sized companies as opposed to larger firms.
Those executives are more likely to bet personal stakes on their companies' success in an effort to publicly display confidence in their stocks, whereas insiders at larger companies already reap the benefits from equity-based compensation, Moreland said. The companies who have instituted the biggest buyback plans this year have generally been large-capitalization companies.
"These large companies are where I least expect to see insider buying," Moreland said.
Disney, Wal-Mart, and Intel were the top three companies on TrimTabs' list that had huge buyback programs, yet no top executives purchased stock during the year.
A Disney spokesman pointed out the company said on its previous earnings call that it has repurchased 52 million shares for approximately $2 billion during its fiscal year, but declined further comment. Wal-Mart and Intel weren't immediately available for comment.
Buybacks typically reduce the number of shares outstanding for a company, which can help boost earnings per share and ultimately propel share prices higher. Actual stock buybacks among companies in the Standard & Poor's 500 index totaled nearly $90 billion in the first quarter, up 63% from a year ago.
"Insiders are willing to use the huge amount of cash on their balance sheets to prop up their stock prices, but they're not personally interested in buying their stock," Biderman said. "This shows stock prices are too high relative to what insiders think they're really worth."
Some thoughts:
Clearly, one reason for the recent corporate borrowing binge is that low rates might not last and companies are anxious to lock in some cheap money. They're then using some of it to buy back stock. Not surprising as far as it goes. But the divergence between companies which are buying and insiders who are not is interesting. You'd think that executives who are optimistic about their companies would be front-running their corporate buybacks by loading up on the shares themselves. That they're not implies that they're either unimpressed with business conditions or they're worried about the impact of all this new debt. Instead, as Trim Tabs notes, insiders don't seem to think shares are a buy at current levels.
It's also interesting that just two years after a debt-driven market collapse, companies would go right back to borrowing -- would, in fact, take on more debt than they carried in 2007. This completes a dangerous trifecta: government, household and corporate debts are all at (or near in the case of households) record levels. Historically, record debts lead to recessions, not vigorous expansions. And recessions produce bear markets.
As always, the devil is in the timing. In a "normal" world this kind of debt would signal the monetary authorities to step on the breaks -- or cause borrowers to stop borrowing. But today it seems to be having the opposite effect. To counter the threat of another debt implosion, central banks are creating more credit, while borrowers are addressing an uncertain future (due mostly to excessive debt) by borrowing as much as possible. This is what happens when central banks try to bend the laws of economics.
