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CFO Journal
Exclusive
reporting and analysis for corporate-finance executives.
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12:11 pm ET
Sep 22, 2015 |
Debt |
Buybacks Take Tumble Amid Wary Debt
Investors |
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By
Maxwell Murphy
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US
dollar bill. Big companies slashed spending on share repurchases in
recent months.
—Getty Images |
As debt-fueled
share repurchases increasingly worry bond
investors, large companies sharply curtailed overall buybacks in
recent months.
S&P 500 companies spent
$134.4 billion on repurchases during
the three months ending July 31, according to FactSet. That’s off nearly
7% sequentially from the April period.
FactSet said companies bought back 2.8% of its aggregate shares outstanding
during the year ended in July, which was the smallest showing for the index
in more than four years. Even with the decrease, companies still spent more
8% more on buybacks than they generated in in free cash flow, or operating
cash flow less capital expenditures.
Companies hadn’t outspent their quarterly free cash flow on buybacks since
the October period in 2009.
Activist investors
are pushing companies to return more
cash to shareholders, even at the expense of capital expenditures. In an era
of tepid global growth,
buybacks can also goose per-share earnings
at a better clip than underlying net income increases. For executives whose
bonuses are tied to EPS growth, this can mean bigger paydays.
Last year, 22 companies in the index posted higher EPS
solely due to reducing their share count.
Historically low interest rates also mean companies with generous dividends
can issue debt with coupons lower than their dividend yields, meaning a
swift
buyback will more than pay for itself.
But
bond investors remain wary of using
debt proceeds for buybacks rather than investments in the business. “In
terms of an orange-level alert, or a red-level alert, I think we’re at an
orange level,” Putri Pascualy, a portfolio manager at Pacific Alternative
Asset Management Co., said in June.
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