How companies pay for those billion dollar stock buybacks

With limited growth opportunities, companies have increasingly opted to deploy their excess cash in the form of cash dividends and stock buybacks.

For the economy, this is disappointing as more jobs are created when companies use their cash to invest in the form of research and development (R&D) and capital expenditures, which include spending for growth and maintenance.

All of this has been happening during a time when the Federal Reserve has kept monetary policy very loose and interest rates very low in its effort to stimulate growth.

Indeed, corporations have taken advantage of low interest rates to load up on cheap debt. In fact, debt levels for North American companies (excluding financials) have more than doubled since the financial crisis.

The question is: how much of this new cheap debt is being used to finance stock buybacks? Because that would mean the Fed has effectively enabled financial engineering that’s enriching folks in the stock market.

It turns out not to be that much.

“Over the last 12 months, 27% of repurchases have been at least partially funded by issuing new debt,” observed JPMorgan’s Dubravko Lakos-Bujas. “While this portion is elevated, stock buybacks remain overwhelmingly funded with internally generated funds rather than debt (net debt as % of total assets is near record lows).”

According to Lakos-Bujas, S&P 500 companies have announced 238 new buyback authorizations since the beginning of the year, with a dollar volume of $US553 billion. This puts buyback announcements on track for a record year run rate of $US666 billion, the highest since the $US690 billion level hit in 2007.

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