As the accompanying chart indicates, over the past decade, net issuance of public stock — new issues minus buybacks — has been a negative $3 trillion. This reduction in the supply of public shares in American companies, coupled with an increased global demand for them, goes a long way toward explaining why stocks are now priced at 25 times earnings, well above their historical average.
The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy.
It used to be that issuing bonds was the most common way for corporations to borrow money. A decade ago, in 2008, there was $2.8 trillion in outstanding bonds from U.S. corporations. Today, it’s $5.3 trillion, after the record $1.7 trillion of new bonds issued last year, according to Dealogic, and $500 billion more issued this year.
In recent years, at least half of those new bonds have been either “junk” bonds, the riskiest, or BBB, the lowest rating for “investment-grade” bonds. And investor demand for riskier bonds has largely been driven by the growth of bond ETFs — or exchange traded funds — securities that trade like stocks but are really just pools of different corporate bonds. ETFs have made it easier for individual investors to participate in the corporate bond market. A decade ago, about $15 billion worth of bond ETFs were being traded. Today, that market has grown to $300 billion.
