Uh-oh: Companies Are Stampeding to Buy Back Their Own Stock (Just Like Before the 2008 Crash)

Interesting column in Wall Street on Parade by Pam Martens and Russ Martens. From the link:

. . . Yesterday, both the S&P 500 and the Dow Jones Industrial Average posted record high closing levels with Nasdaq closing above 5,000 – within spitting distance of its old high set 15 years ago. (Yes, it’s been a long tough slog for investors in the Nasdaq index.) And, accompanying this seemingly bullish news for stock investors is a startling assessment this morning of what’s going on behind the scenes with share buybacks from Lu Wang and Oliver Renick at Bloomberg News. Here’s the bullet points of their story:

• Stock buybacks and dividends are eating up “almost all the Standard & Poor’s 500’s earnings”;

• Even with “earnings estimates deteriorating,” corporations have announced “an average of more than $5 billion in buybacks each day.”

• “Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009”;

• Companies could be overpaying for their stock. “The S&P 500 trades at 18.9 times earnings, compared with an average of 16.9 since 1936, data compiled by Bloomberg and S&P show.”

Buybacks in an overpriced market when corporate insiders stand to make tens of millions of dollars as their stock options move deeper into the money, is a serious cause for worry. Wall Street On Parade reported in July of last year that the largest Wall Street bank, JPMorgan Chase, had spent $18 billion buying back its shares from 2010 through 2013. According to a quarterly filing with the SEC at that time, the company said “the Firm’s Board of Directors has authorized the Firm to repurchase $6.5 billion of common equity between April 1, 2014 and March 31, 2015.”

Our thoughts back then are the same as today: . . .