Should the Market Trust Record Cash Mergers and Buybacks?

Investors usually love it when companies return cash to the shareholders. This can be done via dividends or by share buyback plans. Another way companies can grow and make money for shareholders down the road is by making acquisitions. It turns out that in 2015, U.S. companies spent more of their actual cash buying back their own shares of stock than the cash component of acquisitions — and both added up to a record over any prior year.

Buying back stock is a way to limit share count growth, shrink the float and boost earnings per share. You rarely see high-flying growth stocks buying back stock. Growth companies would probably rather use cash to make acquisitions or to invest in their ongoing growth with new operations and new avenues. So what does it tell you if more cash is funding shareholder returns?

TrimTabs Investment Research announced this week that cash takeovers and stock buybacks in United States hit a record $1.41 trillion in the year 2015. Last year’s volume easily surpassed the previous record of $1.27 trillion from 2007.

TrimTabs thinks this is an ominous sign for the economy, as corporate America turned to financial engineering as revenues and profits stagnated.
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Cash takeovers were at $682 billion. As a reminder, this is the “cash” component of acquisitions rather than the cash and stock. Still, this was very far above the previous record of $448 billion seen in 2007. TrimTabs views this as a cautious signal, pointing out that the prior interim peaks in 1999 and 2007 both coincided with major market tops.

TrimTabs further showed that U.S. companies announced share repurchases of $725 billion in 2015. This was second in all-time rankings, behind only a level of $810 billion recorded in 2007.

Some of the largest cash mergers last year were Dell’s agreement to buy EMC using $46.2 billion in cash, Anthem’s $45.0 billion all-cash offer for Cigna, Berkshire Hathaway’s $32.4 billion all-cash offer for Precision Castparts and Charter Communications’ $28.3 billion all-cash bid for Time Warner Cable.

TrimTabs said:

It’s not surprising that corporate America turned more to financial engineering as revenue and profits stagnated. … The merger boom is a longer-term negative signal for U.S. equities. Stock performance tends to deteriorate after periods of heavy merger activity, which is what we saw in the second half of last year.

As a reminder, 14 Wall Street strategists see positive but choppy stock returns for the S&P 500 Index in 2016.