Yesterday, Carl Icahn sent a letter to Apple (AAPL) CEO Tim Cook asking him to use some of the $133 billion on the company's balance sheet to buy back more shares of stock.
Across the market, share buybacks are already at the highest levels in the past seven years.
Peter Schiff, CEO of EuroPacific Capital says this is not a good thing. “Companies in America are spending about 100% of their profits on share buybacks and dividends,” he notes. “Normally, even a 50% payout ratio would be considered high. Companies need to reinvest; they need to grow their business, make capital investments.”
Schiff says the average age of corporations' plants and equipment has not been this high in more than 60 years. He argues that while U.S. companies continue to pacify investors in the short term with these buybacks, foreign companies are instead upgrading through capital investments, and we should be following their lead. “You need the capital investment to get the jobs,” he told Yahoo Finance’s Jeff Macke.
So what, then, are the consequences in the long term, especially for those companies borrowing cash to institute these buybacks? “When the monetary spigots close and interest rates rise," Schiff says, "the cost of servicing all this debt goes up. Also, when the stock markets go down...companies have to issue new shares in order to repay some of the debt. They end up buying high and selling low and they’re destroying shareholder value.”
Schiff says what is pleasing to investors now will end very badly not just for them, but the U.S. economy as a whole somewhere down the road.
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