Share buy-backs highlight low corporate confidence
It’s good news for bondholders and shareholders that companies are awash with cash: it’s bad news for everyone that they can find nothing better to do with it than buy back their own shares.
A feature of the third-quarter earnings season in Europe was the number of large corporations reinstating share repurchase programmes. Vodafone and Diageo were prominent examples while Groupe Danone announced new plans to divert surplus cash to buying in stock and BHP Billiton announced a share buy-back on withdrawing its bid for Potash Corp. Tracking this trend, Morgan Stanley notes a doubling in 2010 of the number of companies buying back shares and the volume of transactions compared with 2009. The firm also points out that companies have a lot of firepower to put behind these repurchases. Cash has become a big portion of the corporate assets of the EuroStoxx 600 companies, accounting for 7.5% of total assets.
With profit margins back to 2005 and 2006 levels, corporations look to be in robust health. It’s just a shame they remain so reluctant to invest.
Europe is simply catching up with the US. Moody’s has calculated that cost-cutting in the recession of 2008 and subsequent resurgent earnings even in a moderate recovery since 2009 have helped US non-financial corporations build a cash hoard of nearly $1 trillion. That equates to 28% of their total outstanding debt and far exceeds their present plans for capital expenditure or dividend payouts.