New Year’s Prediction #1: Corporate America Borrows Smart

Fed will keep interest rates low, and buybacks will continue

   
New Year’s Prediction #1: Corporate America Borrows Smart

One of the biggest trends for 2012 already has started: For the first time, we saw corporations bypass banks as a source of lending. Instead of begging leery and unsteady banks for new capital to fund expansion, companies chose to issue bonds to raise the money on their own.

Now, you might hear some shocking statements from the major news outlets like CNBC, specifically from Herb Greenberg, who will tell you that companies that issue debt to implement corporate stock buybacks are going down a dangerous path. This couldn’t be further from the truth.

Essentially, companies can issue bonds at very low interest rates and use the extra capital to:

  1. Refinance their existing debt at lower interest rates
  2. Buy back their existing stock
  3. Buy out their competitors

All of which increase shareholder value and earnings per share.

Currently, companies are issuing new debt at a rate of up to $60 billion per week (up to a $3 trillion annual pace), and I expect this trend to persist until at least 2013. This is because the Fed has released its playbook for how to handle the recovery through 2013, and the conditions will remain just right for corporate borrowing.

First, the Fed isn’t going to raise interest rates. Higher interest rates would exacerbate the debt problem, and that’s the last thing the recovery needs. Plus, the Fed reiterated in its latest FOMC statement that it is going to continue to flatten the yield curve via Operation Twist. This effectively helps to lower borrowing costs for Corporate America even further, so these interest rates will encourage even more debt offerings as companies take advantage of ultra-low interest rates and continue aggressively buying back their outstanding stock.

Many blue-chip companies are taking full advantage of this opportunity:

  • Altria Group (NYSE:MO) plans to buy back $1 billion in stock by the end of 2012.
  • AutoZone (NYSE:AZO) plans to repurchase $659 million in stock in Q2 2012.
  • Dollar Tree (NASDAQ:DLTR) plans to buy back $1.5 billion in stock.
  • Dr Pepper Snapple Group (NYSE:DPS) has authorized a $1 billion stock buyback program on top of its ongoing $2 billion stock buyback program.
  • Reynolds American (NYSE:RAI) has pledged to purchase $2.5 billion of its stock by mid-2014.

This is going to be the first catalyst that pushes these stocks higher in the new year, and that’s just the tip of the iceberg:

New Years Prediction #2: Upward Swing in Jobs and GDP


Article printed from InvestorPlace Media, http://investorplace.com/2012/01/new-years-prediction-corporate-america-borrows-smart/.

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