From John Del Veccio at economyandmarkets.com:
So like a lot of people, I’ve gotten suckered into following the presidential race. As of last night, the Republican field has narrowed to just three candidates. That’s a long way from the 19 or so who started out, but who’s counting?
Not too long ago Carly Fiorina was still in the race. Everyone remembers Carly as the former CEO of Hewlett Packard who lost her job. I remember when Carly took over as the Chief Executive back in 1999. In her six-year tenure, the company bought about $14 billion of its stock, which was $2 billion more than it had made in profits.
Again, that was just in six years. Over the next six years, her first two successors bought back about $53 billion. That was as of 2011. I don’t even want to know how much the current CEO has purchased, as corporate buybacks have only grown more popular in recent years.
I was reading an article about buybacks published in Business Insider this past weekend. It said that they’ve accounted for almost all of the stock market’s gains since 2009.
That didn’t really surprise me. I knew the market’s rally over the past few years has been fueled by shenanigans. But, I was shocked by the sheer amount of buybacks that actually is.
The article quotes an HSBC research report that says S&P 500 companies have bought back $500 billion in stock in the last two years, and $2.1 trillion since 2010.
That’s an amazing statistic. And it gets weirder.
On a cumulative basis, individual investors and pension funds haven’t contributed one ounce to the market’s rise over that time. Every bit of it has come from these stock buybacks.
If you’ve also read that the Fed has been responsible for virtually all of the stock market’s moves since the financial crisis, it’s really the same point. Low interest rates made it cheap for companies to take on debt and then buy back their stocks.
It’s one way companies can juice their earnings per share because it reduces the share count. But, it’s a low-quality source of earnings growth. It has nothing to do with demand for a company’s product or services. And it comes at the expense of innovation and research and development.
It’s all financial engineering.
This chart shows that hundreds of millions of dollars have been added in buybacks each month and at a growing pace since 2010. It lines up with what we’ve seen in the S&P 500.
To continue reading: No Wonder the Stock Market’s So High: It’s All Corporate Buybacks
