Wry & Dry

US stocks' Ponzi scheme

A few issues ago, W&D noted that Australian banks were borrowing capital to significantly pay dividends.  Well, in US companies senior executives they have their own sort-of-Ponzi scheme.  

During the 12 months ended June, companies in the S&P 500 (i.e. the largest 500 companies listed on US stock exchanges) spent $555b repurchasing their shares [1].  Which, for the first time since October 2009, was more than their free cash flow.  They were borrowing to buy back their own shares.  And at prices at then record highs.  That seems, well dumb and dumber.

So what's the deal?  

A cynic might suggest some senior executive self interest.  It's all about share options.  Consider this:

                     1. Company issues free share options to executives
                     2. Share prices rise
                     3. Executives exercise their options and get shares
                     4. Executives sell their shares on the market
                     5. Company buys back shares on the market

Outcome:  The number of shares on issue is unchanged.  But the executives have more money, and the company (i.e. shareholders) less.