Stock buybacks financed by record borrowing

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Disbursement of corporate cash through dividends and stock buybacks totaled $1,073.5 billion in Q1 2006 (annualized quarterly data), compared to net corporate profits after tax of only $509.5 (also, annualized quarterly data), according to the Federal Reserve flow of funds accounts for Nonfarm Nonfinancial Corporate Business.

Corporate executives borrow to buy company shares (ultimately, from themselves)

This massive distribution of corporate cash exceeded net profits after tax and was financed by borrowing with credit instruments (mainly bonds and mortgages) and by drawing down reserves for depreciation.

Increased corporate borrowing through credit instruments for the quarter (annualized) amounted to $232.1 billion.

Dividends rise

The low point in cash dividends seen in Q3 2005 ($179.3 billion) was dramatically reversed in Q1 2006, with dividends reaching $486.7 billion (quarterly, annualized).

It seems unlikely that corporations will be able to continue to simultaneously increase dividends, buybacks, and borrowings at a rate faster than net profits after taxes for much longer.

Executive profligacy

The use of borrowed funds to buy back corporate stock and thereby boost prices and give value to stock options would seem the height of executive profligacy, imprudent management, and fiduciary failure, but never mind … fiddle-de-dee … tommorrow is another day.