Don’t look now, but the US stock market’s biggest buyers of stocks are losing their wherewithal and consequently, must reluctantly pull away from the market. From Tyler Durden at zerohedge.com:
Back in early 2014, we first explained how it was possible that with the Fed’s QE tapering, the S&P kept rising higher despite declining intervention by the Fed in capital markets: the answer was corporate buybacks, which had then soared to the highest level in history.
This artificial stock-support by CFOs and Treasurers only increased in the subsequent year, with buyback announcements hitting a record high one year later, in May 2015, as also profiled previously.
Then after the early euphoria of 2015, repurchase activity slowed down. As Factset observes in its just released quarterly buyback report, the dollar-value of share repurchases amounted to $134.4 billion over the second quarter (July), which represented a 6.9% decline from the first quarter (April) and a 0.4% decline year-over-year. On a trailing twelve-month basis (TTM), dollar-value share repurchases totaled $555.5 billion, which was approximately flat with the first quarter.
On the surface, this is good news, but, and here there is a huge “but”… because the reason for the drop off in buybacks has nothing to do with corporate executives reigning in their desires for higher stock prices and thus, higher equity-linked compensation, and everything to do with funding limits. Because while buyback activity may be slowing down it is only due to one thing: a collapse in free cash flow among S&P500 companies, with energy companies at the forefront, but increasingly all sectors being hit by a dramatic slow down in FCF creation. According to Factset while LTM buybacks declined by 1.3%, Free Cash Flow over the same period plunged by a whopping 29%!
To continue reading: Spending On Buybacks Surpasses Free Cash Flow