Merry F%@#ing Buyback Christmas
- Joshua M Brown
- December 25th, 2013
2013 was the Year of the Buyback.
You really don’t need any presents today because you’ve been getting them all year, from your Secret Santas in Corporate America!
Share repurchases were the driving force behind virtually everything this year. According to Steven Russolillo’s piece at the Wall Street Journal, we saw roughly $128.2 billion in share buyback activity in the 3rd quarter of this year – a six-year high. That’s a 32% jump over the 3rd quarter of 2012, says FactSet Research, which also informs us that “the third quarter also marked the highest number of companies engaging in a buyback over a trailing twelve-month period (431, or 86%) since Q4 2008.”
The S&P 500 Buyback index (the 100 companies doing the largest buybacks as a percentage of their market caps) surged ahead by 45% this year versus the 28% return for the overall market. That’s a pretty enormous move, both absolutely and relatively speaking.
In the 12 months ending September 30th, buybacks totaled a whopping $445.3 billion, a year-over-year increase of 15% says S&P Dow Jones Indices. Let me put that $445.3 billion annual run-rate in perspective for you:
* For starters, that amount is equivalent to the annual budget of the entire US Department of Defense ($440 billion). It’s also two-and-a-half times all Federal income taxes paid by corporations ($181 billion last year).
* It’s more than four times greater than the total amount of net inflows to stock mutual funds and ETFs this year ($106 billion).
* It eclipses the total charitable contributions that Americans give each year ($300 billion) by more than 30%.
* You could hold the Beijing Olympics ($41 billion) ten more times for this amount of money or feed every single child in the world for a year ($54 billion) eight times over. Or you could buy up more than half of all the buildings and real estate in Manhattan ($802 billion).
* You could clean up after Hurricanes Sandy, Ivan, Ike, Andrew, Katrina and Ivan. Twice. Or buy out McDonalds, Taco Bell, Pizza Hut, KFC, Wendy’s, Burger King and Chipotle ($150 billion) thrice.
* Adjusted for inflation, this $445 billion is just shy of the total amount the US government spent on the New Deal economic recovery package ($500 billion in today’s dollars) that brought us back from the Great Depression and about four times the size of the Marshall Plan that rebuilt Europe after WWII ($115 billion in today’s dollars).
* You could take this $445 billion and buy every single team in the NFL, NHL, NBA and Major League Baseball – all 122 franchises (estimated by Forbes to be worth a combined $77 billion) – five times and still have enough left over to buy out ESPN ($60 billion) to air all their games.
US corporations took care of their shareholders over this past year like almost never before – but it wasn’t out of altruism. In a low-growth environment the easiest way to boost share prices, raise earnings per share and secure higher compensation is by shrinking the publicly available float of shares. It’s less risky career-wise for a CEO or a board of directors than expansion or acquisitions – and if you can augment a cash hoard with debt financing at almost zero cost, why not?
The alternative, of course, is actually innovating or bringing in more employee mouths to feed, who wants to get involved with that? Financial engineering requires very little thought and even less hiring. Whatever, it’s awesome. Who cares.
The lesson here is that greed always finds a way.
Determined corporate managers will come up with a solution to any problem – in this case, the problem concerned hitting annual incentive targets to keep stockholders happy and activist shareholder types at bay. If there’s anything you can bet on in this world, it’s that American capitalists will always figure out a way to get paid more and keep their fiefdoms. In this case, it just so happened that you had a chance to be along for the ride.
And what a ride it was.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.