Key Pillar of the Market - Share Buybacks - Could be at Risk

Rock-bottom interest rates allow the market to stay higher for longer than it would otherwise, writes Steven Russolillo in this week’s Wall Street Journal. One factor that could end the party, however, is the amount of cash companies are paying out to investors.

Not surprisingly, robust dividend payments and buybacks are big draws for investor dollars. However, the article quotes New York University professor Aswath Damodaran as saying, “This is the weakest link in the market. He says, “the inability of companies to sustain large cash payouts to investors will cause the next downturn.”

During the first two quarters of the year, according to Damodaran, S&P 500 companies collectively returned 112% of their earnings through buybacks and dividends, the highest level since 2008. Russolillo says that lackluster quarterly sales and profit numbers “could force companies to buy less of their own stock and would take away a pillar of support for this market,” adding that “tepid” earnings growth projections for the coming quarters highlight the issue. “Maintaining dividends and repurchasing stock,” he writes, “will only become more difficult.”