Higher US Rates Will Put a Damper on Stock Buybacks

For the last several years, big U.S. companies have lived by an unswerving rule: buy back shares to increase returns to shareholders.

Investors, too, have benefited from company spending habits as they bought shares of the biggest repurchasers.

This year has been a bit different. The buybacks have continued, but companies doing them have trailed the S&P 500 stock index as investors anticipate higher interest rates.

Headed into 2016, with the Federal Reserve beginning what many expect will be a prolonged, if slow, cycle of interest rate increases, analysts say the quality of a company’s balance sheet could matter as much as whether it is reducing the number of shares on issue.

The Fed is expected to raise interest rates at the end of its Dec. 15-16 meeting for the first time in nearly a decade. While the increase in borrowing costs for big-name companies will be minor, it could continue if the Fed raises rates further in 2016.

“A quarter of a percentage point is not going to make much of a difference,” said to David Joy, chief market strategist at Ameriprise Financial in Boston. However, as the Fed keeps raising rates, those companies borrowing money to buy back their shares will likely be hurt most, he said.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza