Filed under: Management, Newspapers
According to The Financial Times, September is looking to be the weakest month for announcing share buybacks in four years. The credit crunch and concerns about future liquidity are apparently leading many companies to focus on shoring up their balance sheets, rather than returning cash to shareholders through buybacks. The popular process of borrowing large amounts of money to buyback shares also appears to be fading as borrowing costs rise.
This could spell trouble for the markets: Thomson Financial estimated that more than 20% of earnings growth for S&P 500 companies would be a result of buybacks. If the buybacks grind to a halt, will earnings suffer? It seems likely.
But think about that 20% figure. If it’s accurate, that means that more than a fifth of corporate earnings growth is smoke and mirrors — phantom earnings growth created by financial engineering rather than business. And it’s unsustainable: Many of the massive share buybacks that have been announced are too large to be covered by the companies’ free cash flow: They require a dip into shareholder’s equity, and are a one-shot deal.
If corporate earnings growth is being driven by buybacks, we need to be scared. It means our economy is actually doing a lot worse than it looks.
Continue reading Credit crunch slows buybacks
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