Bonds for Buybacks Never Bigger in U.S. as $58 Billion SoldOliver Renick
It’s official, using proceeds from debt sales to send cash to stockholders has never been more popular.
Standard & Poor’s 500 Index companies listed buybacks or dividends among the use of proceeds in $58 billion of bond deals in the past three months, the most on record, according to data compiled by Bloomberg and Sundial Capital Research Inc. More than $460 billion in repurchases were announced during the first five months of 2015, on pace to top last year’s record.
“Insatiable appetite among investors for yield” and pressure from activists fueled the borrowing, Jason Goepfert, president of Sundial, said in an e-mail. “The easy pickings are boosting the dividend or buying back shares, no matter that the shares in many cases are more expensive than they’ve been in many years.”
U.S. companies from AT&T Inc. to Rite Aid Corp. sold almost $500 billion in bonds during the past three months amid record low borrowing costs, according to data compiled by Bloomberg. The highest quality companies sold $374 billion in bonds, 21 percent more than in the same period last year.
“Companies know the Fed is winding down easy money so a lot are running to the gates using debt to fund repurchase programs,” Rob Leiphart, an analyst tracking buyback data at Birinyi Associates Inc. in Westport, Connecticut, said by phone. “There are a lot of people saying, who knows what’s next for the market, and the buyback program provides flexibility.”
S&P 500 companies have repurchased $2.7 trillion in shares during the last six years, a period that coincides with the second-longest U.S. bull market since the 1950s. At 18.8 times annual profit, the gauge is trading more than 2 percentage points above its average valuation in the last decade.
An S&P 500 index measuring the performance of the top 100 stocks with the most buybacks has added 13 percent in the past year, compared with an 8.3 percent gain in the benchmark index.
Among bond issuers who mentioned one or the other, about 70 percent identified buybacks as use of the proceeds and 30 percent dividends, Goepfert said. In total, 65 bond sales from mid-March to mid-June cited the shareholder-friendly activites as uses of the money, Bloomberg data show.
On June 1, MetLife Inc. issued $1.5 billion of bonds with the sole purpose of funding repurchases of the company’s preferred stock, the biggest bonds-for-buyback program this year. Apple Inc. listed share repurchases or dividends among the uses for funds in about $16.5 billion of bond sales this year.
“The combination of exceptionally low interest rates and record high stock prices is just too irresistible for companies with both excellent and poor credit quality,” Goepfert, who’s based in Blaine, Minnesota, wrote June 16 in his daily research note, SentimenTrader.
The track record of companies in timing share repurchases is reason for concern, Goepfert said, a sentiment that’s echoed by a University of Kentucky analysis from 2014.
In a study of 5,498 companies, professors found that while the average annual return on buybacks was 7.7 percent, companies would have gotten gains of 2 percentage points more per year had they not tried to time the market and bought shares at a constant level quarter to quarter.
Executives’ proclivity for buybacks may reflect efforts to stave off pressure from activist investors, according to Larry Pitkowsky, co-founder and co-managing partner at Goodhaven Capital Management LLC.
“There’s some fear about activists, and letting shares get to low-enough valuations to be a target,” Pitkowsky said in an interview at Bloomberg offices in New York. “Low interest rates give you a fictitious hurdle to doing things. It looks accretive, but what happens when those bonds roll over and they’re at 6 percent instead of 3 percent?”