Market Distortations: Buybacks and Dividends
With Lance Roberts & Gordon T Long
23 Minutes, 31 Slides
Corporate stock buybacks and dividends are great strategies to drive up stock prices and rewards shareholders, but there is a dangerous downside when this is primarily the result of temporary cheap money and 'manufactured earnings' from creative accounting magic.
Lance Roberts and Gordon T Long with the aid of 31 charts highlight why this is happening, how reported earnings are disconnected from the underlying economy and the risk to investors that has emerged as a consequence. Lance categorizes this period as the biggest 'reverse Robin Hood effect' in history with wealth over the last 5 years being transferred from the middle class to the upper wealthy class.
Stagnate sales growth in the top line is a direct result of low levels of corporate capital. The capital investments being made are primarily targeted at cost reductions in labor. With labor at historic lows, as a percentage of record profits, corporations may be ill prepared to maintain current levels of earnings, dividends and buybacks.
In this wide ranging conversation on the future of buybacks and dividends, the subjects explored include:
- Productivity and exploding automation advances in the service sector,
- A slowing rate of global aggregate demand growth,
- Shrinking real disposable income levels,
- Current corporate cash flow levels but falling EBITDA flows,
- Off balance sheet borrowing for buybacks and dividends,
- Asset to Debt levels showing the degree of growth in leverage to manufacture earnings.
Consumption doesn't create a strong economy. Wealth doesn't come from consumerism.
Wealth is created as a result of capital spending which has plummeted!
Both Lance and Gord believe strongly that more deflation is still ahead before broad based inflation takes hold. Money velocity continues to fall with wage inflation frozen and commodity price inflation showing only in pockets.
The global economic slowdown we are presently seeing will put pressure on corporate earnings and their ability to maintain current buyback and dividend levels.
Lance warns of risk and how important and little appreciated "Loss of Capital" and "Loss of Time" is to most individual investors.
NOTE: 24 hours after this show was taped, Trim Tabs announced that new stock buybacks in Q1 2014 fell to $134.4B from $214.4B in Q4 and were the lowest in 5 quarters.
"Corporate actions have turned less supportive of stock prices. The decline in the volume of buybacks is a cautionary sign, as buyback volume and the S&P 500 have a high positive correlation."
Trim Tabs Chief Executive David Santschi
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