There is a distinct irony in Trump raging at company executives for announcing and executing trillions in buybacks in the past few years, most of which were accompanied by a tremendous increase in debt particularly in the lowest rated investment grade space and which now threatens to crash the entire US credit market: it was Trump’s tax policies that unleashed the wave of buybacks in the first place!
In recent days, amid the broad populist outcry against companies – such as Boeing and most US airline companies – that feasted on buybacks for years, sending their stock price and total debt to all time highs, only to demand a taxpayer buyback now that they actually need the liquidity, liquidity they would have had access to if only they had invested for a rainy day instead of making their shareholders richer by repurchasing stock, President Trump has taken the lead in the blowback against buybacks when on Thursday he said that he would not oppose barring companies that receive federal assistance during the coronavirus pandemic from conducting stock buybacks.
“It takes many, many people in this case to tango, but as far as I’m concerned conditions like that would be okay with me,” Trump said during a White House press conference adding that “he was never happy with that.“
“We don’t want that,” President Trump tells @jonkarl when asked if he guarantees that that billions going to help industries amid coronavirus won’t go to executive bonuses or stock buybacks.
— ABC News (@ABC) March 19, 2020
In the meantime, many US companies scrambling to preserve cash, have already “generously” announced they would halt buybacks, such as most US banks, although in light of the current economic environment that has seen much of the US economy grind to a halt with banks such as Goldman now expecting an unprecedented 24% drop in Q2 GDP – nearly double the peak hit during the Great Depression – the reality is that most companies have no choice but to cut back on anything but absolutely critical spending to keep the lights on. Spending on buybacks and dividends certainly is not included here.
Sensing the shift in public mood which may preclude a bailout, the CEOs of the largest US airlines asked Congress Saturday for urgent help, and used the veiled threat of laying off thousands of workers among the industry’s 750,000 employees if their demands are not met.
“Unless worker payroll protection grants are passed immediately, many of us will be forced to take draconian measures such as furloughs,” the CEOs said in a letter to leaders of both houses of Congress distributed by the Airlines for America trade group. “The breadth and immediacy of the need to act cannot be overstated,” it said. “It is urgent and unprecedented.”
Airlines for America represents American Airlines, United Airlines, Delta Air Lines and Southwest Airlines as well as shippers FedEx and UPS.
“On behalf of 750,000 airline professionals and our nation’s airlines, we respectfully request Congress to continue to move expeditiously to pass a bipartisan proposal that includes a combination of worker payroll protection grants, loans and loan guarantees and tax measures. Time is running out.”
The signatories appeared to be trying, in part, to counter recent negative publicity over reports that in recent years the airlines, while taking in billions in profits, used stock buybacks and other measures to reward shareholders rather than putting money into workers’ salaries or a rainy-day fund.
President Donald Trump seemed to allude to those reports during Saturday’s White House briefing on the coronavirus, saying of plans to help US companies, “I want money to be used for workers and keeping businesses open, not buybacks.
“I am strongly recommending a buyback exclusion. You cannot buy back your stock. You can’t take a billion dollars of the money and buy back your stock.”
Ah, but just four years ago you told them something totally different…
In late 2016, when the first glimpse of Trump’s tax plan emerged and when we learned that it would also include a foreign profit repatriation holiday allowing companies to bring back fund held offshore at a nominal tax rate, we wrote in article titled “How The S&P 500 Will Spend $2.6 Trillion In Cash Next Year” and said “Hint: Mostly On Stock Buybacks.“
While the Trump administration’s contention was that companies would use this newly repatriated cash mostly on buybacks, R&D and hiring, we countered by warning that “stocks buybacks will account for the largest share of cash use by S&P 500 companies.” Furthermore, we used a Goldman projection that predicted that “of the $2.6 trillion in total cash spent by companies [in 2017], the largest bucket, or 30% of the total, will be on stock buybacks; this is the highest portion of corporate cash allocated to buybacks since 2007.“
In trying to explain to the Trump administration what this meant, we also said that “it goes without saying, that as more cash is allocated to shareholder payouts (buybacks, dividends), less goes to CapEx, and economic growth.“
Alas, none of this was a consideration for the Trump admin at the time, when “President-elect Trump and House Republicans both expressed support for a one-time tax on untaxed foreign profits. In their “blueprint” of potential tax reform, House Republicans proposed an 8.75% tax on permanently reinvested overseas cash and a 3.5% tax on other untaxed foreign earnings. Mr. Trump also proposed similar tax reform during his Presidential election campaign.”
We then concluded by predicting precisely what would happen in the subsequent 3 years, and culminate with the current crisis in which buybacks are demonized even though for the past 3 years repurchasing their stock is all most CFOs and Treasurers did to boost their stock price, to wit:
In short, absent a formal directive from the Trump administration on explicit “use of repatriation proceeds”, which curbs or outright limits the $1,200 billion or so in estimated repatriated proceeds, from being spent on buybacks… there will be virtually no benefit to the broader economy, and instead corporate shareholders will once again reap the benefits as they have for the past 7 years, a time in which they levered up their companies to all-time highs, with the vast majority of the newly raised debt used to fund, drumroll, buybacks.
We were right, because what happened then can only be described as an unprecedented shareholder-friendly bonanza, with companies splurging on buybacks and dividend like never before, and as we repeatedly warned, this would end in tears as companies for the first time since the financial crisis spent more on buybacks and dividends than they actually earned…
… yet which nobody dared to object to because as we showed last September, the sole buyer of US stocks were corporate buybacks, not institutions or retail investors, all of whom sold to the companies buying back their own shares, in the process lifting the S&P to all time highs.
And, it goes without saying, that as more and more companies joined the fray, with tech firms mostly responsible for the latest buyback push in recent years due to having the biggest balance sheet capacity to issue new debt as well as the cleanest cash flow…
… corporate cash plunged – as it was mostly used to buyback stocks which would life the stock price and allow management’s equity-linked options to vest deep in the money – even as the company’s debt soared, raising the prospects of a catastrophic outcome if and when a “black swan” event occurred.
Well the black swan is now here, and in retrospect, instead of spending trillions on buybacks, companies should have saved that money for when they truly needed it – such as an economic or financial crisis. But no, managements rushed to buyback record amounts of stock at the all time highs, as we pointed out last October…
… a spending spree that was funded mostly by – drumroll – debt…
… and not just any debt, but the debt most in danger of sparking a wholesale junk bond crisis and which would then become a wholesale credit crisis: the BBB rated future “fallen angels”:
And the biggest irony: corporate insiders such as CEOs and board members were selling stock hand over fist to their own companies, as they knew very well what was coming next.
In short, it is these same insiders that sold near record amounts of stock that now demand bailouts.
It is these same companies that levered up astronomically and pursued in record buybacks that now demand bailouts.
But in retrospect, none of this would have been able if Trump had not set the precedent he did back in late 2016 when he effectively gave companies the green light to unleash a buyback tsunami by allowing them to repatriate trillions in offshore cash without any guidance what to spend it on, and to nobody’s shock, they didn’t spent it on growth, or even deleveraging, they spent it on pushing up their own stock price.
And since the interests of management, shareholders and Trump were all aligned – there is a reason why Trump took tremendous delight in pointing out every time the market hit an all time high which was mostly possible due to buybacks, just as there is a reason Trump pressured the Fed to cut rates, as that would allow companies to issue even more debt at ultra low rates and use the proceeds to buyback stocks – everyone, EVERYONE, was delighted by this record buybacks spree.
Now, the party is over, and the fingerpointing and the blame games have begun.
But before Trump slams those “greedy” corporate CEOs for doing merely what capitalism said was in their best interest, he should look in the mirror and consider who greenlighted this entire stock repurchasing bonanza.
And since he won’t, here is some more advice, almost four years after we predicted to the dot that all of this would happen: do not bailout everyone as that would be the end of any last shred of capitalism as we know it. Instead, either force companies to sell stock to procure liquidity – you know, buybacks in reverse – or allow the US bankruptcy process to work.
Yes, Chapter 11 is an amazing tool, one which allows companies to continue operating without having to pursue mass layoffs, while restructuring their liabilities and kicking out the existing equityholders who should get nothing, handing over the company instead to the bondholders. A leaner, meaner company, with no debt, one which would be far more viable in the world once the coronavirus panic fades away. As for those companies that don’t survive, well they should go out of business: thanks to the Fed there is now a record amount of zombie companies and “disruptors” that have no chance in hell of ever making a profit…
… corporations that should never have existed had it not been for the Fed’s insane monetary policies of the past decade.
Let those companies that should fail, fail, and let capital finally find more productive uses than being forced to keep zombies alive and repurchasing the stock of companies that burn through billions in cash every year.
Alas, this will never happen and just like in 2008 when the bailout of the banking sector set the blueprints for every future crisis, the government and the Fed will pursue a wholesale bailout of everyone as even the smartest financial advisors on Wall Street now (predictably) urge, because it’s the least painful (at least for now) and most politically self-serving thing to do.
And then, in ten years, when the entire fiat system finally implodes in a world drowning in meaningless “money” filled with zombie companies where nobody makes a profit any more, and where every dollar in profit and quadrillions more in debt are used to repurchase the handful of stocks that still are traded, we will have one final “I told you so” moment.