Author Topic: Corporate debt/equity and buybacks: driving the bull market?  (Read 985 times)

ChpBstrd

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Corporate debt/equity and buybacks: driving the bull market?
« on: October 02, 2017, 09:51:00 AM »
I found this article interesting. The thesis is that companies are selling high-yield bonds to pensions and other fixed income investors, and using the proceeds to do share buybacks, explaining both the boom in credit and the boom in equity prices. The conclusion is that this can continue for years, but of course there's a limit to just increasing leverage. That made me look up the second link, which implied corporate debt/equity ratios are actually declining, despite headlines saying otherwise. Am I reading these bits of info correctly?

"Since the S&P 500 index  hit its bear-market bottom in March 2009, it has soared nearly fourfold, even though “main investors” have sold a total of $9.89 billion worth of stock, Reynolds said, using Bloomberg data. That’s because the cumulative total of corporate stock repurchases has been about $3.2 trillion, he said.
And since the credit market has grown by $3.3 trillion since the credit crisis, Reynolds sees it as nearly a one-to-one correlation between the credit boom, share buybacks and the bull market."


http://www.marketwatch.com/story/this-is-why-the-bull-market-can-keep-running-for-years-even-if-investors-dump-stocks-2017-09-29

https://fred.stlouisfed.org/series/TOTDTEUSQ163N

chasesfish

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Re: Corporate debt/equity and buybacks: driving the bull market?
« Reply #1 on: October 03, 2017, 06:07:30 AM »
There's no easy answer to this...

Its all about the stability of cash flow relative to the debt level of the company.  Plenty of companies significantly reduced their leverage from 2007 to 2011 and plenty of companies are in industries where they've grown significantly while their debt filled competitors failed.

The complete implosion of the European debt market has kept long term rates down very low.  I own Costco stock, they've decided to go from debt free to perpetually carrying about $3bil in debt (against a company with a $72bil enterprise value).   They pay back some of the debt over three years, then re-borrow and pay a special dividend and have done this three times over the last six years.

You can increase returns by reducing equity and increasing debt, but you increase risk to the equity holders. 

If you are an index investor, care more about the 2nd piece than the first.  If you're an individual stock investor, you have to watch the balance sheet/leverage closely.