David Stockman just published a
chart so compelling that he didn't feel the need to add any commentary.
But there are a few things to be said about the tendency of public
companies to repurchase their shares at the very top:
"Peak buyback" is a sign that executives are seeing fewer
opportunities to generate positive returns by building new factories or
hiring new people, and so choose to give their free cash back to investors.
This is NOT a good thing for the future of the business.
Low interest rates turbo-charge this process by making it profitable to
buy back shares with cheap borrowed money. The result is soaring debt for the
companies with the biggest repurchase programs. Here, for example, is a chart
of IBM's debt (blue) and equity (orange) compiled by Morningstar.
As recently as 2012 Big Blue's balance sheet was fairly solid, with about 40%
equity. In two short years equity fell to less than 25%:
Obviously this process is limited by the finite amount of equity
outstanding. Another three years like the last two and IBM will have
completed a leveraged buyout and become a private company.
The best data point on Stockman's chart is 2008 when, one year after the
achievement of peak buyback, companies not only stopped repurchasing shares
but started issuing new shares -- in a plunging market. In other words,
public companies spent three years buying back shares at ever-higher prices
only to sell $99 billion of them back at a discount. This is typical dumb
money behavior, akin to the margin calls that decimate individual brokerage
accounts during bear markets.
The second best data point is 2014 when share repurchases exceeded their
2007 level. Now the question is which of the next few years will reprise
2008.
