{"id":18555,"date":"2019-07-20T02:42:42","date_gmt":"2019-07-20T02:42:42","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=18555"},"modified":"2019-07-20T02:50:13","modified_gmt":"2019-07-20T02:50:13","slug":"buybacks-are-hurting-growth","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/07\/20\/buybacks-are-hurting-growth\/","title":{"rendered":"Buybacks are hurting growth"},"content":{"rendered":"

Preliminary Q1 results from S&P Dow Jones Indices show S&P 500 dividends and buybacks continue to exceed reported earnings in the first quarter of the current year.<\/p>\n

\"S&P<\/p>\n

While this could be a spill-over of offshore funds repatriated as a result of the 2017 Tax Cuts and Jobs Act, companies have distributed more than they earned since 2014 (Q4). That leaves nothing in reserve for new investment or increases in working capital, both of which are necessary to support growth.<\/p>\n

In my last post<\/a> I highlighted that before-tax corporate profits, adjusted for inflation, are below 2006 levels and declining. Reported earnings for Q1 2019 on the above chart (preliminary results) are only 3.5% higher than the same quarter in 2018. If we strip out inflation, estimated at 2.0%, that leaves only 1.5% real growth.<\/p>\n

S&P 500 earnings per share growth for Q1 2019 is marginally better,\u00a0 at 6.1%, because of stock buybacks.<\/p>\n

\"S&P<\/p>\n

But the S&P 500 buyback yield is 3.49% (Source: S&P Dow Jones Indices). On its own, that should boost eps growth by 3.6% (1\/[1 – 0.0349] – 1 for the quants). There seems to be 1.0% missing.<\/p>\n

\"S&P<\/p>\n

Warren Buffett has pointed this issue out repeatedly for the past 20 years:<\/p>\n

“…We will repurchase stock when it falls below a conservative estimate of its intrinsic value. We want to be sure that when we repurchase shares that the remaining shareholders are worth more the moment after we repurchased the shares than they were before.”<\/em><\/span><\/p><\/blockquote>\n

If stock is repurchased at above intrinsic value then shareholders will be worse-off. The company receives a poor return on its investment in much the same way as if it had over-paid for an acquisition.<\/p>\n

Here is a simple example:<\/p>\n

If a company is trading at 100 times earnings and achieving 20% organic earnings growth per year, it is most likely over-priced. Now that company buys back 10% of its own stock (numbers are exaggerated for illustration purposes). Earnings will stay the same but earnings per share (eps) increases by 11.1% (the inverse of 90%).<\/p>\n

If the same funds used for the buyback had been invested in a new project with a modest 5% initial return on investment, earnings would have increased 50% (and eps likewise).<\/p>\n

The larger the buyback yield, the more that growth is likely to deteriorate — especially when earnings multiples<\/a> are dangerously high.<\/p>\n","protected":false},"excerpt":{"rendered":"

Preliminary Q1 results from S&P Dow Jones Indices show S&P 500 dividends and buybacks continue to exceed reported earnings in the first quarter of the current year. While this could be a spill-over of offshore funds repatriated as a result of the 2017 Tax Cuts and Jobs Act, companies have distributed more than they earned … <\/p>\n

Continue reading “Buybacks are hurting growth”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[57,1,34],"tags":[3249],"class_list":["post-18555","post","type-post","status-publish","format-standard","hentry","category-stock-markets","category-uncategorized","category-us-canada-countries-regions","tag-stock-buybacks"],"yoast_head":"\nBuybacks are hurting growth - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Buybacks are hurting growth - the patient investor\" \/>\n<meta property=\"og:description\" content=\"Preliminary Q1 results from S&P Dow Jones Indices show S&P 500 dividends and buybacks continue to exceed reported earnings in the first quarter of the current year. 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Volatility remains at extreme levels and chances that this rally will fail are high. Earnings for S&P 500 stocks are forecast to fall by 40% when compared to the March quarter last year and 38% for the\u2026","rel":"","context":"In "Stock Markets"","block_context":{"text":"Stock Markets","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/stock-markets\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":7555,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/04\/24\/dr-eds-blog-dividends-buybacks-the-bull-market-excerpt\/","url_meta":{"origin":18555,"position":2},"title":"Dr. Ed’s Blog: Dividends, Buybacks, & the Bull Market (excerpt)","author":"ColinTwiggs","date":"April 24, 2013","format":false,"excerpt":"Ed Yardeni highlights that a surge in dividends and share buybacks is driving the current bull market: Most importantly, during the current earnings season, US corporations continue to announce dividend increases and more share buybacks. Previously, I\u2019ve shown that this corporate cash flow into the stock market--which totaled $2.1 trillion\u2026","rel":"","context":"In "Earnings & Dividends"","block_context":{"text":"Earnings & Dividends","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/earnings-dividends\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":17993,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/03\/22\/buybacks-interest-rates-and-declining-earnings-growth\/","url_meta":{"origin":18555,"position":3},"title":"Buybacks, interest rates and declining growth","author":"Colin Twiggs","date":"March 22, 2019","format":false,"excerpt":"The Fed did a sharp about-turn on interest rates this week: a majority of FOMC members now expect no rate increases this year. Long-term treasury yields are falling, with the 10-Year breaking support at 2.55\/2.60 percent. Expect a test of 2.0%. While the initial reaction of stocks was typically bullish,\u2026","rel":"","context":"In "Debt Levels"","block_context":{"text":"Debt Levels","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/debt-levels\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":15282,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/05\/14\/sp-500-price-earnings-ratio-rises\/","url_meta":{"origin":18555,"position":4},"title":"S&P 500 Price-Earnings Ratio rises","author":"ColinTwiggs","date":"May 14, 2017","format":false,"excerpt":"With 84.4% of S&P 500 index constituents having reported first-quarter earnings, 302 (73.84%) beat their earnings estimates while 77 (18.83%) missed. Forward estimates for 2017 contracted by an average of 4.6% over the last 12 months but not sufficient to raise the forward Price-Earnings Ratio above 20. That is the\u2026","rel":"","context":"In "Earnings & Dividends"","block_context":{"text":"Earnings & Dividends","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/investing\/earnings-dividends\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18373,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/06\/11\/if-earnings-undershoot-stocks-will-fall\/","url_meta":{"origin":18555,"position":5},"title":"If earnings undershoot, stocks will fall","author":"Colin Twiggs","date":"June 11, 2019","format":false,"excerpt":"Annual employment growth is falling while average hourly earnings growth remains high. This is typical. Ahead of the last two recessions (gray bars below), average hourly earnings growth (green) held steady while employment growth (blue) declined. If annual employment growth (blue line on the above chart) falls below 1.0% then\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18555","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=18555"}],"version-history":[{"count":7,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18555\/revisions"}],"predecessor-version":[{"id":18568,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18555\/revisions\/18568"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=18555"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=18555"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=18555"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}