HH The Stock Buyback Conundrum: Will Companies Keep It Up Much Longer?

Granted, there are eternally bullish advocates like Liz Ann Sonders who claim that retail investors and pension funds will pick up the slack when corporations stand down. (Really? These groups will suddenly add substantially to their stock allocations after seven years?) Ms. Sonders also believes that a softening in buybacks would simply morph into capital expenditures, and thereby boost corporate growth prospects going forward. The problem with that assumption? “Core CapEx” has rarely looked worse at a time when the Fed is not considering additional emergency easing measures.

CapEX Non Defense

For roughly one year, our tactical approach to asset allocation has called for a defensive bias. We downshifted our moderate growth-and-income clients from 65%-70% diversified growth (e.g., large-cap, small-cap, foreign, etc.) to 45%-50% high-quality stock. Appropriate ETFs in this arena include iShares MSCI Quality Factor (QUAL), PowerShares S&P 500 Quality (SPHQ) and/or iShares MSCI Minimum Volatility (USMV).

We lowered moderate clients from 30%-35% diversified income (e.g., investment grade, higher yielding, foreign, etc.) to 25%-30% investment grade bonds. Appropriate ETFs for investment grade assets include SPDR Nuveen Municipal Bond (TFI), iShares 7-10 Year Treasury (IEF) as well as Vanguard Total Bond (BND).

The resulting 20%-30% cash/cash equivalent allocation has buffered against several volatile 10%-plus corrections (i.e., August-September and January-February). We anticipate putting the cash back to work at lower prices when the S&P 500 reaches a bearish low-water mark (1705) and/or the Federal Reserve announces a fourth iteration of quantitative easing (QE4). Indeed, we concur with the assessment that the expansion of the Federal Reserve’s balance sheet has been responsible for 93% of stock gains since the bull market inception in March of 2009.

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Disclosure: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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Moon Kil Woong 5 years ago Contributor's comment

Thanks for the insightful article. Sadly many poorly run companies are buying back shares to cover their loss in marketshare, lack of vision, and to please bankers promoting their stocks by borrowing from them to fund unsustainable policies. Thus, many companies engaging in high stock buybacks should be sold for that reason, not acquired, especially if their cash flow looks horrific due to this.

As many will point out, cash flow is king in businesses. Stock buybacks often make a bad situation worse as the company looses its assets to deal with business doing it and gets nothing but more shares of a bad company for it.