The Fed expects continued low U.S. inflation and weak economic growth according to today’s FOMC statement.
They even made it clear that they are prepared to deliver additional quantitative easing if necessary, which means that the Fed will err on the side of caution and interest rates are likely to remain lower for longer.
Now jump over to the many international companies who sit on growing cash piles earning nothing, but are faced with uncertain growth prospects for new investment, and today’s FOMC statement only emphasises why share buybacks and M&A will accelerate going forward.
We’ve talked previously about the wide spread between stock and bond valuations right now, and how it makes sense for large stable multinationals to issue cheap debt in order to buy back their shares or buy the shares of other companies. Low interest rates in the bond market mean that the hurdle rate for any investment return is very low. Heck, you could buy out some companies with debt financing and earn a spread from their dividend these days, while also gaining an entirely new business unit. Or for slightly more interest than you pay on your own dividend, you could retire existing shares with debt via buybacks, and increase the ownership stake and per-share earnings for all remaining shares.
So historically low interest rates, historically low expected economic growth, and historically low share prices all say one thing — more buybacks and M&A. Today’s FOMC statement only makes us more confident that it’s on the way, if not already unfolding.