One of the side effects of the Fed’s zero interest rate policy, is companies relying on cheap debt to buy back shares each quarter to keep their stock price artificially pumped. I keep thinking this is going to end soon (and badly), but great companies continue to hollow themselves out – loading up on cheap debt that will have to be refinanced at some point. These companies are also selling core assets and using financial engineering – buying their over inflated stock just to meet the next quarters EPS estimates. Here are two examples:
- United Technologies unveils $12 billion buyback
- IBM Reports Terrible Q3 Earnings: Worst Revenue Since 2002; Slashes Guidance
In IBM’s case – these tricks are no longer working – can’t believe Buffet invested so much in big blue.
I have nothing against a company buying back its stock if it is selling at a discount – but that is not what is happening right now.
Morningstar provides a nice breakdown here:
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