American businesses are sitting on record amounts of cash and have come under pressure from activist shareholders to put that money to productive use.So much for the hopey-changey stuff. Share buybacks, however, aren't productive either.
Notably, such usage has not included investing heavily in plant and equipment, given a perceived lack of growth opportunities in an economy still hobbled by cyclical deleveraging and long-term demographic change.
For companies operating in industries with excess capacity, acquiring or merging with a competitor can expedite needed consolidation.
And in a sign of healthy restraint, relatively few corporate hookups in 2015 have been "synergistic," the flimsy rationale often used to justify combining two disparate businesses while inflating egos and compensation packages.
Given excess supply and inadequate demand in the global economy, however, an emphasis on share repurchases and M&A makes sense over the short-term.Yes, although there may be limits to how far that string can be pushed. And the principal-agent challenge inherent in any limited-liability corporation with ownership divided from control is likely to pose challenges that will long outlast the protracted non-recession-non-recovery of the Age of Obama.
But therein lies another concern.
Since the mid-1990s, the correlation between stock prices and executive compensation has grown tighter, implying that CEOs have incentives to maximize short-term performance at the expense of long-term gain.
From that perspective, buybacks and M&A — while perhaps appropriate under current circumstances — could add to already bloated executive pay at the expense of future economic growth and lasting shareholder value.
Overall, the share buyback/M&A surge can be viewed as either bullish or bearish for stocks and the economy.
I'm inclined to go with the latter interpretation, although continued monetary largess from the Federal Reserve could send the 6-year-old bull run into extra innings.