95% Of S&P 500 Profits Are Being Shoveled To Shareholders

About 95% of all profit earned by companies in the S&P 500 is on pace to be used for share buybacks, according to a new report from Bloomberg’s Lu Wang and Callie Bost.

The report, citing data from Bloomberg and S&P Dow Jones Indices, said that in 2014 companies are on pace to spend $US914 in buybacks and dividends, or about 95% of all profits earned by these companies.

That seems like a lot.

Earlier this month, Josh Brown at The Reformed Broker highlighted a Wall Street Journal report that noted companies spent 31% of their cash flow on buybacks in the second quarter of this year, the most since 2008.

Warning about the recent glut of share buybacks, however, is not a particularly new refrain.

Back in late August, Albert Edwards at Societe Generale wrote that companies increasing their borrowing to buy back their own stock has lead to market making a “hissing sound.”

And in July, noted hedge funder Stanley Druckenmiller highlighted the financial engineering undertaken by IBM over the last several years, with the company seeing flat sales but a rising stock price due to a tripling of its balance sheet to buy back stock.

Druckenmiller called IBM the “poster child” for this kind of activity, and said, “Capital spending is the lowest it’s been relative to sales in many, many years. That’s the reason productivity is down. We’ve got to get out of this financial engineering stuff and get more into investing in the real economy.”

On this background, however, nonresidential fixed investment, essentially business investment, jumped 8.4% in the second quarter.

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