Buybacks have increased threefold in the year to the first quarter

Big US corporates used to issue bonds to finance payouts to investors. Increasingly, the trend is towards selling them for the same purpose. A recent note by JPMorgan states that buyback volumes have increased threefold to $150 billion in the year to the first quarter, alongside $217 billion of repatriations. Among the consequences are riskier balance sheets and more expensive borrowing. The most important reason for this change is US tax reform. Cash-rich corporates, such as Apple and Microsoft, had previously accumulated foreign profits offshore. A tax holiday and the introduction of a more territorial system makes repatriation of past earnings cheaper. Foreign proceeds were invested in bonds. Dividends and share buybacks were funded by bond issuance to avoid a repatriation tax bill. Domestic debt financed a bond portfolio offshore… With the tax charge reduced, companies have started to liquidate their investment portfolios… The most likely uses of the proceeds are dividends or buybacks as well as M&A transactions… Assuming that debt is not simultaneously repaid, net debt increases — and with it leverage. Portfolios are large enough that movements can have significant effects beyond their owners’ balance sheets. Upward pressure on borrowing rates occurs just as balance sheets become riskier. Investors should include this “corporate tapering” in their investment calculations.