Borrowing from Peter to Pay Paul

Net Buybacks and Change in Debt for U.S. Companies are Correlated

Heartland Advisors Value Investing Market Insight Russell Chart

Source: Furey Research Partners and Russell®, 12/31/1985 to 12/31/2015
Last 12 Months (LTM)

As credit markets continue to tighten, companies that have used financial engineering to boost earnings per share (EPS) may be particularly hard hit. As shown, since the end of the Great Recession, management teams increasingly turned to debt as they aggressively bought back company stock. The move allowed CEOs to boost results even when sales were flat by reducing the number of shares that have a claim on each dollar of revenue.

With rates moving higher and signs emerging that investors are souring on leveraged balance sheets, the shortcut to EPS growth may be turning into a dead end. Year-to-date*, businesses in the Russell 3000® Index with the most debt have lagged the broader benchmark and have been among the worst performers.

If this trend continues, we believe businesses with low or no debt that have the ability to improve earnings through sales growth will be poised to outperform in the coming quarters.

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Author

Heartland Advisors Value Investing Portfolio Manager Bradford A. Evans

Bradford A. Evans

Evans, CFA, is Senior Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 20 years of industry experience, 17 at Heartland.

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