• 10 hours What Is Africa’s Role In The New Silk Road?
  • 1 day Trump Was Right About The Dollar
  • 1 day Is Silver Gearing Up For A Rally?
  • 2 days World’s Largest Hedge Fund Turns Bullish On Gold
  • 2 days It’s Time To Spend More On Clean Energy R&D
  • 2 days Contrarian Investors Are Beating The Stock Market
  • 2 days Bulgaria’s Revenue Agency Falls Victim To Biggest Cyber Heist In History
  • 3 days Amazon Faces European Union Anti-Trust Probe
  • 3 days Commodities Are Having A Stellar Year
  • 3 days Bezos’ Next Big Project Could Be Worth $100 Billion Per Year
  • 3 days 3,600 Years Later, Climate Change Turns Mammoths Into $40M Market
  • 4 days Tesla, Apple Claim China Is Stealing Intellectual Property
  • 4 days EV Giants Duke It Out For Battery Dominance
  • 4 days Tech Billionaire Takes Aim At Google
  • 4 days Chinese Police Bust Largest Ever Illicit Crypto Mining Operation
  • 5 days Expect A Pullback Before Gold's Next Major Rally
  • 5 days Why Interest On Gold Matters
  • 5 days Ten Extravagant Food Items For The Wealthy Only
  • 6 days Why Saudi Arabia Won't Give Up On The Aramco IPO
  • 6 days $32 Million Crypto Heist Halts Tokyo Exchange
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

John Rubino

John Rubino

John Rubino edits DollarCollapse.com and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners…

Contact Author

  1. Home
  2. Markets
  3. Other

What Can't Go On Won't Go On, Part 1: Corporate Leverage

By now everyone knows the corporate share repurchase story, about how major companies are engineering higher per-share profits and share prices by buying back their stock and raising their dividends. But just how much they're spending may still come as a shock.

Today's New York Times quotes Laurence Fink, CEO of mutual fund giant of BlackRock, bemoaning the short-sighted behavior of his peers: "Mr. Fink noted that companies in the Standard & Poor's 100-stock index are paying out 108 percent of their earnings to shareholders."

That's a lot of cash flowing out the door, and leads to the obvious question of where the excess is coming from. This morning Bloomberg provided the answer, via a chart from Citigroup analyst Stephen Antczak, which is of course that they're borrowing it:

Corporate leverage 2015

Gross corporate leverage for both investment-grade and junk borrowers is at record levels, and defaults are, not surprisingly, now projected to start rising. The implication: borrowing terms are going to become a lot less favorable, staring with low-quality names and then moving up the ladder to the Blue Chips doing most of the repurchasing. Says Citi:

"The robbing Peter to pay Paul dynamic that has dominated the investment landscape in recent years may be coming to an end as the credit cycle begins to turn and a meaningful pickup looms in the corporate default rate.

Recent conversations that we've had with equity [portfolio managers] suggest that they have become far more focused on revenue growth, and are placing far less of a premium on any financially engineered EPS growth. The fact that a basket of stocks that [has] been reducing shares outstanding is meaningfully underperforming the S&P 500 on a beta-adjusted basis suggests that this view may not be that of just the investors we talk to, but far more broadbased.

Corporate buyback share performance 2015

Now the question becomes what, if anything, takes up the slack when corporations stop buying back their shares. One candidate is an inflow of foreign capital fleeing the even bigger messes now being made in China and Europe. But barring that, US share prices will have lost a huge source of support.

 

Back to homepage

Leave a comment

Leave a comment