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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
This ties in to some recent data we've discussed on the buzz.
Last Monday, FactSet
[subscription required] that Q1 dividend and buyback activity
reached $249.1 billion for the
Michael Sedacca subsequently
[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.
) 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.
), 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
There's definitely a bubble-like flavor to this boom, but it's a
You can love it or hate it as long as you understand it.