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Low Rates Are Vital For Stock Buyback Party
Companies buying back their own stock are a major market force, according to one new piece of research.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Yesterday, the Wall Street Journal published an interesting article about the power of share buybacks.

Jeffrey Kleintop, Chief Market Strategist of LPL financial, found that the biggest net buyer of stocks is companies buying back their own stock.

This ties in to some recent data we've discussed on the buzz.

Last Monday, FactSet reported [subscription required] that Q1 dividend and buyback activity reached $249.1 billion for the S&P 500 (INDEXSP:.INX).

Michael Sedacca subsequently pointed out [subscription required] that this number annualizes to $1 trillion, bigger than Fidelity's whole equity mutual fund business, which has $791 billion in assets.

And keep in mind, buyback money is fresh money, not the mere exchange of one stock for another.

Buybacks were $158.6 billion, and we can assume that some of the $90.5 billion in dividends paid was in dividend reinvestment programs or otherwise put back in the market.

According to FactSet, in Q1, free cash flow to equity (which reflects net borrowing) was up 9%. So even with low single-digit earnings growth, the buybacks (and dividends) can continue until we enter a real economic downturn.

Remember, when there are more buyers than sellers, stock go up, regardless of the underlying fundamentals.

Of course, this means it's absolutely vital that rates stay low:

1) Low rates mean lower interest expenses for net debtors, boosting earnings and cash flow.
2) Low rates make financing buybacks dirt-cheap.

Monsanto (NYSE:MON) is the latest example of a company selling stock to fund a giant buyback, announcing last week that it raising debt to fund $10 billion of repurchases over the next two years. Disney (NYSE:DIS), Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and many others are executing similar strategies.

On a related note, low rates make acquisitions sensible for cash-rich companies. Earning near-zero returns on cash means there's a low hurdle to make a positive return-on-investment on an acquisition.

There's definitely a bubble-like flavor to this boom, but it's a boom nonetheless.

You can love it or hate it as long as you understand it.

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
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Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Low Rates Are Vital For Stock Buyback Party
Companies buying back their own stock are a major market force, according to one new piece of research.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Yesterday, the Wall Street Journal published an interesting article about the power of share buybacks.

Jeffrey Kleintop, Chief Market Strategist of LPL financial, found that the biggest net buyer of stocks is companies buying back their own stock.

This ties in to some recent data we've discussed on the buzz.

Last Monday, FactSet reported [subscription required] that Q1 dividend and buyback activity reached $249.1 billion for the S&P 500 (INDEXSP:.INX).

Michael Sedacca subsequently pointed out [subscription required] that this number annualizes to $1 trillion, bigger than Fidelity's whole equity mutual fund business, which has $791 billion in assets.

And keep in mind, buyback money is fresh money, not the mere exchange of one stock for another.

Buybacks were $158.6 billion, and we can assume that some of the $90.5 billion in dividends paid was in dividend reinvestment programs or otherwise put back in the market.

According to FactSet, in Q1, free cash flow to equity (which reflects net borrowing) was up 9%. So even with low single-digit earnings growth, the buybacks (and dividends) can continue until we enter a real economic downturn.

Remember, when there are more buyers than sellers, stock go up, regardless of the underlying fundamentals.

Of course, this means it's absolutely vital that rates stay low:

1) Low rates mean lower interest expenses for net debtors, boosting earnings and cash flow.
2) Low rates make financing buybacks dirt-cheap.

Monsanto (NYSE:MON) is the latest example of a company selling stock to fund a giant buyback, announcing last week that it raising debt to fund $10 billion of repurchases over the next two years. Disney (NYSE:DIS), Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and many others are executing similar strategies.

On a related note, low rates make acquisitions sensible for cash-rich companies. Earning near-zero returns on cash means there's a low hurdle to make a positive return-on-investment on an acquisition.

There's definitely a bubble-like flavor to this boom, but it's a boom nonetheless.

You can love it or hate it as long as you understand it.

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Low Rates Are Vital For Stock Buyback Party
Companies buying back their own stock are a major market force, according to one new piece of research.
Michael Comeau    

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

Yesterday, the Wall Street Journal published an interesting article about the power of share buybacks.

Jeffrey Kleintop, Chief Market Strategist of LPL financial, found that the biggest net buyer of stocks is companies buying back their own stock.

This ties in to some recent data we've discussed on the buzz.

Last Monday, FactSet reported [subscription required] that Q1 dividend and buyback activity reached $249.1 billion for the S&P 500 (INDEXSP:.INX).

Michael Sedacca subsequently pointed out [subscription required] that this number annualizes to $1 trillion, bigger than Fidelity's whole equity mutual fund business, which has $791 billion in assets.

And keep in mind, buyback money is fresh money, not the mere exchange of one stock for another.

Buybacks were $158.6 billion, and we can assume that some of the $90.5 billion in dividends paid was in dividend reinvestment programs or otherwise put back in the market.

According to FactSet, in Q1, free cash flow to equity (which reflects net borrowing) was up 9%. So even with low single-digit earnings growth, the buybacks (and dividends) can continue until we enter a real economic downturn.

Remember, when there are more buyers than sellers, stock go up, regardless of the underlying fundamentals.

Of course, this means it's absolutely vital that rates stay low:

1) Low rates mean lower interest expenses for net debtors, boosting earnings and cash flow.
2) Low rates make financing buybacks dirt-cheap.

Monsanto (NYSE:MON) is the latest example of a company selling stock to fund a giant buyback, announcing last week that it raising debt to fund $10 billion of repurchases over the next two years. Disney (NYSE:DIS), Apple (NASDAQ:AAPL), IBM (NYSE:IBM), and many others are executing similar strategies.

On a related note, low rates make acquisitions sensible for cash-rich companies. Earning near-zero returns on cash means there's a low hurdle to make a positive return-on-investment on an acquisition.

There's definitely a bubble-like flavor to this boom, but it's a boom nonetheless.

You can love it or hate it as long as you understand it.

Twitter: @MichaelComeau

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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