Massive issuance of bonds by non-financial corporations, largely to finance an extraordinary level of stock buybacks, helped force bond interest rates upwards in Q1 2006. (See Flow Table F212).

The annualized rate of bond issuance by non-financial corporate business rose to $240.4 billion in Q1 2006, four times the issuance rate of 2005.

The graph shows that, for years, the principal issuers of corporate bonds into the U.S. market have been the financial sectors (green bars) — mainly issuers of asset-backed securities raising funds for mortgages and consumer finance.

	Principal Issuers of Corporate & Foreign Bonds

Non-financial Corporations Raise Money For Buybacks

The annualized rate of issuance of corporate bonds by the financial sectors rose from $679.3 billion in 2005 to $725.4 billion in Q1 2006, while the financial sector’s share of the issuance market fell from 90% to 70% due to the extraordinary level of bonds issued by non-financial corporations.

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On June 12, 2020, the Wall Street Journal lead front page headline was, “Big Companies Put Record Sums Into Buybacks — Repurchases Aim to Bolster Shares but Come at Expense Of Investments in Growth“.

For capital flow analysts, this is hardly news, but for the Wall Street Journal to at long last acknowledge the real purpose of buybacks (to boost share prices) and even suggest that the practice may have negative connotations and “come at the expense of investments for growth” — now, that is real news!

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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.

This massive distribution of corporate cash that exceeded net profits after tax, was financed by borrowing with credit instruments (mainly bonds and mortgages) and by drawing down reserves for depreciation. Increased borrowing through credit instruments for the quarter (annualized) amounted to $232.1 billion.

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.

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.