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Buybacks and Dividends On Record $Trillion Pace

At the current pace, 2018 will mark the first year that corporate buybacks and dividends top the $trillion mark.

Buybacks among S&P 500 Index members hit a record in the first quarter and more than a third of the index raised dividend payments.

Key Points

  1. At $1.6 trillion, cash and cash equivalent stayed near all-time highs
  2. Share purchases surged 34 percent to a record $178 billion, surpassing the previous peak of $172 billion reached in 2007
  3. Tech companies accounted for about a third of total buybacks, with repurchases more than doubling from a year earlier. Apple set a record with $22.8 billion
  4. Financial firms spent roughly the same as last year, a sign that Fed approved buybacks may have been fulfilled
  5. No company cut its dividend for the first time in at least 15 years. Among those that raised payouts, the increase averaged 10 percent
  6. Capital expenditures are up 21% as well to $159 billion.

In regards to point number one, most of that cash is actually debt.

Point number two is interesting. Here we go again?

Capital expenditures are up 21% but how much of that was planned anyway? It is doubtful Trump tax cuts played a major role in expenditures.

Question of the day: Is this what it takes to hold the stock market flat?

Mike "Mish" Shedlock

Sounds like the tax plan is performing as advertised

And notice how back in 2009-10, (when stocks were actually cheap) there was almost no buyback activity going on. How do you spell "M-A-L-I-N-V-E-S-T-M-E-N-T"?

Trump seems to rely heavily on marketing targeted at uninformed listeners. He seems to be easily swayed by his insider staff and WTH is Kushner still in there?

As I’ve said before buybacks increase earnings, which pushes the stock up to make executives options more valuable Unless you are a small company who needs options to be able to compete for top talent, gigantic buybacks are extremely hard to justify. Instead of using debt for research and development, buying new equipment, and hiring new workers to increase market share, corporate America keeps taking on massive debt to line their own greedy pockets so that when the downturn comes, the first thing they’ll do is to start laying people off.

Dividends and buybacks are real flows of money that leave the stock market. In theory, a buy-back of 50% of shares has the same effect of so loss of 50% of the price.

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Alas, ‘‘twas ever this.

Mish readers, investors, noblemen and fellow Roman citizens, now is the time! Today is the day! Eat, drink and be merry! The final days of Pax Romana may be here sooner than most think.

This is all papered over garbage anyway. The Finance, Insurance and Real Estate (F.I.R.E.) economy was fun for awhile, wasn’t it? The great reset is enroute, but live for today until it arrives!

As I have previously posted, a share repurchase is mathematically identical to a dividend, though there are different tax consequences. For that to be true, all you have to do is to sell a portion of your shares at the same price that the company bought shares, selling the same percentage of your shares as the company repurchased. Last time, I didn't provide a mathematical example to prove it, but this time i will.
Say a company has 1000 shares outstanding, at a stock price of $100, and you own 100 shares (10%). Say that the company wishes to distribute $10,000 to shareholders. Option 1 is to pay a dividend of $10 a share, in which case you get $1,000, and still own 10% of the company. Option 2 is that they purchase 100 shares (10% of the shares) in a stock repurchase. After the repurchase there are 900 shares outstanding. To retain the same percentage ownership, you sell 10 shares of stock for which you receiver $1000. In both option 1 and option 2, the company has $10,000 less, you have $1,000 more, and you still own 10% of the company, so these are identical. Now, suppose the stock prices suddenly falls to $50. The company is able to buy 200 shares with the same money. Unfortunately, however, to get your $1000 you have to sell 20 shares. Now there are 800 shares outstanding, and you own 80 of them. The result? You have $1000 in cash, and 10% of the company, exactly the same as the other two cases.
Share repurchases are mathematically identical to dividends, and the stock price does not matter at all, so long as you, the shareholder, sell a matching percentage of your shares. If you, the shareholder, choose not to sell some shares, you are in essence using your dividend to buy a larger percentage of the company. Thus, by not selling shares, you accept the company's share purchase price as your own purchase price, and in that case it does matter.

2

Hi Carl. I remember you posting that there is no difference between receiving regular dividend payments vs selling an equivalent value of shares (that equals the dividend). To which I responded that there is a big difference. Dividends are simple. You receive a regular payment without having to do anything. On the other hand selling a portion of shares that is the equivalent of receiving a dividend is a pain. First, you actually have to place an order. Second you will have to pay a trading fee. Third, you will be selling an odd lot, which will not get the market price. Fourth, to get an amount equivalent to the dividend, you may need to sell 1.25743 shares or some other ridiculous number of shares. Personally, I would rather sit back and simply collect my dividends.

Setting aside hassle to cash-in, would there still be a difference between dividends and buybacks assuming everyone with brokerage account would be enrolled in DRIP (automatic Dividend ReInvestment Program)?

P.S. dividends are really not constant, guaranteed payment. The yields change and the principal change. Of course there are companies that try to make dividend payments constant.

P.S.2 Although I suspect that buybacks may kinda mess meaning of P/E multiples for someone who uses traditional valuation metrics -

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The real Malinvestment has been done by govt. With the transition from public to private picking up steam, where else would you invest? Besides, buybacks and the Fed are but a fraction of the $80+ TRILLION in global investment looking for a safe haven, which will primarily be stocks when the govt bond bubble officially pops.

Kinda like the mass of investors that believed the gold bugs and dollar haters who said QE would produce inflation, $5000 gold, and new lows in stocks. Who exactly is uninformed?

Hi Wagner. A DRIP is a convenience provided by “some” companies to allow shareholders to use their dividends to purchase further shares without trading fees. The net result is that the dividend actually flows back to the company, and reverses the distribution.That’s essentially the opposite of what Carl is talking about, which is the distribution of excess capital through either dividends or share buybacks. I disagree with Carl. Given a choice between receiving a dividend every 3 months, or personally selling 1.23475 shares every 3 months; I’ll take the dividend. Also, regarding your comment that dividends are not constant, you are correct. Most of my dividend paying stocks typically increase their dividend every year or two. Regarding your comment that dividends are not guaranteed; that is correct, but neither is stock appreciation guaranteed.

All in all, it’s still a great example (sniff, sniff, eyes watering up) of the deliverance of privatized reward (activated executive stock options per private party employment contract) being funded by socialized risk (tax cuts absent any comensurate spending cut) and done so to the applause of both ends of the political spectrum. It’s friggin’ beautiful and Goldman Sachs didn’t even get paid a commission to make it happen.

...umm, I think they didn’t, ... right?

LMAO!

First of all, corporate amerika almost never does layoffs when the downturn starts. They usually wait until the downturn bottoms. Just as they usually hire and expand at the top. If they couldn't buy off politicians to eliminate the competition and get sweetheart deals, they would collapse under real competition...and even then they get bailed out.

If you could get a fixed long-term loan at <4% and invest it in an asset that was virtually guaranteed to rise at double digit yearly returns, what would you do? The govt is making it increasingly more expensive to conduct business and reducing the money consumers have to spend. Why throw money down a black hole? Only govt does that. BTW, its the $80 TRILLION in global investments that is driving the upward trend in stocks, not buybacks or the Fed.

Realist, I just showed the fact that they are mathematically identical, not which a person would prefer. Yes, there are some small costs for the small sales ($4.95 at my broker), but there also can be tax differences. Yes, you can decline to sell shares, in which case you end up with a larger share of the company, the same as if you opted to re-invest your dividends using a DRIP program.

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I hate to say it but your math is incorrect -- go back and read your example for the obvious mistake. In addition, you ignore how the share buybacks are funded (the vast majority in recent years have been funded with debt, not free-cashflow). That makes a big difference over time, especially as the debt is not productive i.e. it is not investing in company growth. Plus, if a stock price gets cut in half, you're assuming that the divi / share buyback remains constant (that's nonsense, except in fairy magic). SocGen released a report very recently saying their research had shown that the vast majority of share buybacks were, in effect, soaking up dilutive executive stock options i.e. buybacks boost stock price, stock options get exercised diluting the share pool, new buybacks soak up excess shares so that EPS is not negatively impacted down the road. Further buybacks drain more shares flattering EPS meaning bonuses (made up of more stock options) are triggered for executives and the whole cycle repeats. There is a small elite group of winners here and it ain't the shareholders. Share buybacks only make sense when they're funded out of free cashflow and the share price does not reflect the true value of the company i.e. it is genuinely under-valued. The number of genuinely undervalued listed companies out there can be counted on the fingers of one hand (the hand of the no-fingered man).

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